The Federal Reserve Is Picking a Fight it Cannot Win

The stock market rallied early this week with receding worry about the omicron variant, but the specter of Federal Reserve monetary policy tightening remains. In his podcast, Peter Schiff talked about the anticipation of the Fed’s fight against inflation and explained why it’s a fight the central bank can’t win.

US stock markets saw big gains Monday and Tuesday (Dec. 6 and 7) with both the Dow and Nasdaq up over 3%. The catalyst was Dr. Fauci saying the omicron variant of the coronavirus doesn’t appear to be as serious as some of the other strains. With that news, the markets went to work recovering the losses from last week. In fact, the rally has recovered almost all of the losses suffered since “black and blue Friday.”

But it was really a 1-2 punch that hit the markets last week. It wasn’t just omicron. There was also speculation that the Federal Reserve was going to tighten monetary policy even faster after Fed chair Jerome Powell said it was time to “retire” the word “transitory.” and that it may speed up the taper by a couple of months. That would potentially move “liftoff” on rate hikes forward a couple of months as well, with rate hikes coming as early as April or May.

Supposedly, this tiny adjustment in policy is now going to vanquish this inflation threat that up until now the Fed completely dismissed. But now that it recognizes that it underestimated how big the inflation fire was going to be, well, it is going to put it out by simply accelerating the taper a bit and hitting inflation with a quarter-point interest rate a couple of months sooner than it had initially planned.”

Peter said he thinks the relief over the omicron variant will be short-lived because the markets will have to refocus on the elephant in the room — inflation and the Fed’s supposed commitment to fight it. As far as the markets are concerned, even slightly less loose monetary policy is construed as tightening.

So long as the Fed is committed to fighting inflation, it needs to tighten monetary policy, which means the stock market no longer has the wind at its back, but the wind in its face, and as a result of that headwind, the market needs to move lower, and it likely will move lower.”

But the markets still don’t seem to understand that what the Fed claims it’s planning to do to fight inflation amounts to nothing.

There is no way that merely finishing the taper a couple of months early and raising interest rates slightly above zero, maybe 50 basis points – hell, maybe they even go all the way up to 1%. That’s nothing in the face of the type of inflation that we already have. So, if the Fed is serious about fighting inflation, it’s going to take a lot more than what it’s indicated it’s willing to do. And of course, if it actually does that, the markets would implode.”

Peter said he doesn’t even think the markets have priced in the small amount of tightening the Fed claims it’s prepared to do, let alone the actual amount of tightening necessary to really take on the inflation dragon.

If the Fed actually applied the type of monetary cure for this inflation problem, the whole economy would get a whole new disease — because we would have another financial crisis. You cannot fight off inflation by raising interest rates and tightening monetary policy without completely deflating the bubble.”

Of course, when that happens, the Fed will abandon the inflation fight and start setting more inflation fires.

That’s the only policy remedy the Fed has for a recession, for a bear market — it is to create inflation. You can’t fight inflation and create inflation at the same time. So, the markets still haven’t figured out the dilemma that the Fed is in, and that ultimately, even if the Fed starts an inflation fight, it’s not going to win it. It’s going to have to surrender because the collateral damage to the economy is politically unacceptable.”

In this podcast, Peter also breaks down the biggest productivity drop in 62 years, explains why consumer prices are heading much higher and real wages lower, talks about America’s sacrifice during WWII compared to the COVID fight, and points out that the US would have to fund a war with China by borrowing money from China.