The Federal Reserve Open Market Committee will meet this week. There is virtually no expectation of a rate hike this time around, but there is widespread anticipation that the Fed will outline its strategy for shrinking its massive balance sheet.
In his most recent podcast, Peter Schiff made a pretty good case that the Fed won’t be able to shrink the balance sheet at all. I fact, he says the central bank will end up having to expand the balance sheet even more when it’s all said and done. The deteriorating economy is one factor, but an even bigger problem for the Fed is the exploding national debt.
With the stroke of Pres. Trump’s pen, the national debt officially surged past the $20 trillion level. That number alone is staggering, but the increasing debt has further ramifications analysts seldom talk about. For every dollar the debt increases, the amount of money the government has to fork out every year just to service the interest payment goes up as well.
We’re talking staggering amounts of money.
Bankers and investors around the world have started to express concern about the rapidly inflating stock market bubble, and its future impact on the world economy. You can add Tiger Management co-founder Julian Robertson to that list.
Robertson appeared on CNBC with Kelly Evans and unequivocally called the stock market a bubble. Not only that, he said it was the Federal Reserve’s fault.
During the interview, Peter made some observations about gold that go a bit against the conventional narrative.
As gold finally pushed through the $1,300 resistance level , most analysts viewed it a direct result of geopolitical tensions, especially North Korea’s continuing belligerence. That’s certainly a factor, but Peter made a pretty strong case that gold’s strength isn’t primarily due to safe-haven buying. It’s about monetary policy.
When central banks manipulate interest rates, they disrupt normal patterns of savings and investment. They pump up economic bubbles that ultimately pop and kick off economic crashes. We saw this vividly in the 2008 financial crisis. Low interest rates, along with government policies, encouraged unsustainable investment in housing. When the bubble popped, it nearly brought the entire economy down with it.
There is another problem with central bank interest rate tinkering that exacerbates bubbles.
It hides inherent risk.
We recently reported that bankers around the world have started to express concern about the rapidly inflating stock market bubble, and its future impact on the world economy. While many in the mainstream banking world agree the problem exists, they see different causes and call for different solutions. Some worry the Fed might raise rates and end expansionary policies too quickly. Some fear the central bankers may not do it fast enough. These contrasting concerns reveal the tight spot the Fed finds itself in. Yellen has put herself between a rock and a hard place. If she tightens, she risks bursting the bubbles. If she doesn’t, she risks inflating bubbles further, leading to an even bigger crash when they finally burst.
The following article by Thorsten Polleit was originally published by the Mises Institute Fed Watch. It offers some in-depth analysis on the options the Fed faces along with a gloomy conclusion. No matter what, it will remain on a course to trouble.
Federal Reserve chair Janet Yellen spoke to Congress yesterday. She talked. But she didn’t say a whole lot.
Most analysts seemed to view Yellen’s speech as “more dovish.” She expressed concerned that inflation my not be rising fast enough to meet the mythical 2% target, and that could slow the pace of rate hikes.
It’s premature to reach the judgment that we’re not on the path to 2% inflation over the next couple of years. We’re watching this very closely and stand ready to adjust our policy if it appears the inflation undershoot will be persistent.”
In his most recent podcast, Peter Schiff made the case that the current environment of rising interest rates is actually bullish for gold.
The most recent jobs report had most of the mainstream giddy with optimism. As the New York Times put it, employers added an “impressive” 222,000 jobs in June, according to the new government report released Friday. The unemployment rate ticked up slightly to 4.4%, but analysts say that was that was due to some people who had dropped out of the labor force coming back.
With rosy jobs numbers to bolster the Federal Reserve’s confidence in the direction of the economy, most analysts became even more convinced the central bank will push aggressively forward with its interest rate normalization program. As a result, many people have turned very bearish on gold. Peter Schiff took on this notion that rising interest rates are necessarily bad for gold in his most recent podcast.
The June Federal Reserve rate hike wasn’t a surprise. Most analysts expected Yellen and company to boost rates by 0.25 points. The only thing that was a little surprising was the hawkish tone the central bankers took at the most recent Federal Open Market Committee meeting. The Fed is hinting it will continue to push forward with interest rate normalization and begin to shrink its balance sheet. This raises an important question.
As we have pointed out, the data simply doesn’t support the hawkish stance taken by the Fed. Even some mainstream analysts have made this observation. So what gives? Why is the Federal Reserve so desperate to hike rates?
As we pointed out last week, the Federal Reserve finds itself stuck between a rock and a hard place. Well, data released last Friday made that squeeze even tighter.
Weak employment and wages have many analysts backing off expectations for aggressive action by the Federal Reserve this year. The Fed has been talking up the economy for months to justify interest rate normalization. But the actual data tells a different story. As Peter Schiff put it in his newest podcast, the most recent weak data further undermines the Fed’s credibility.