Jim Grant: The Fed’s Defacto Dual Mandate of Arsonist and Fireman
Back in December, Peter Schiff said the Federal Reserve’s was about to do the last rate hike of the cycle. He went further and said the “Powell Pause” wouldn’t be enough and the next step would be rate cuts and another round of quantitative easing. Fast forward to today and nearly everybody expects that the Fed will cut rates at least once this year.
Jim Grant appeared on CNBC Markets Now on June 17 and shocked the panel when he said he thinks the Fed will actually cut rates during this week’s meeting. Most analysts expect the central bank to hold pat during this meeting and then possibly cut in July.
Whether or not he’s right about the timing, Grant offers a good explanation as to why the Fed will cut and the likely results. He says the central bank is pursuing a dual mandate of arsonist and fireman.
I think this has become less about Keynes and more about Pavlov. The market has been conditioned to demand a rate cut when it feels a little weak in the knees and the Fed has been inclined to so-grant. I think that there is an almost uncanny consensus that the Fed needs to be easier and you can see it in the unlikely pair of Larry Summers and Donald Trump.”
Grant said he thinks this consensus is based to some degree on the shape of the yield curve, which has been flashing recession.
But Grant said we need to take a longer view. When the tech bubble burst, the Fed accommodated that with a 1% funds rate “in the hopes of levitating house prices to compensate for the decline in stock prices.” That worked. But it led to the housing bust, which the Fed accommodated with nearly a decade of “very concessionary monetary policy.” Now we appear to be on the verge of another turn toward easy money. How many times can this work? Peter has been saying it’s not going to work again.
What Grant said next shocked the panel.
And now I think they’re going to cut in June, but you wonder where it ends.”
He went on to say he thinks the Fed will cut more than once this year.
This raises a key question.
Given the well-known tendency of very low rates to incite speculation and misallocation of resources, and given the well-observed tendency of the Fed to intervene and quash difficulties in the market, is not the Fed operating on the defacto dual mandate of arsonist and fireman?”
Grant was asked about the trade war and what the Fed should be thinking if a deal is reached.
You wonder what monetary policy can do to something as real as trade. What the Fed could do by lowering its interest rate in the face of a non-deal is to give people the idea that rates will still go lower and it is safer to buy securities that would be unsafe at a slightly higher rate of interest, which feeds the problem of misallocation and speculation built on the Fed’s well-intended concern for the economy as a whole.”
When asked if he thought equity prices are too high, Grant said he thinks interest rates are too low.
Certainly, equity prices with respect to bond yields are not especially high. But nobody is getting paid a real rate of return as a bond-holder the world over.”
Does political pressure from Donald Trump have any effect on Federal Reserve policy?
I think that the White House is getting inside the head of the Federal Reserve. And I think these comments to a degree are warranted. I think the Fed ought not to be above politics. The Fed is a creature of the United States Congress. It ought to be answerable to the Congress, therefore to the government, therefore to the people. And I think to treat it as if it were some branch of the church would be the wrong approach. But I think the comments coming from the White House are often brutal and rhetorical … When candidate Trump in 2016 said that thanks to the zero percent rates there was a false economy and a false stock market, and just because he got a new speech writer doesn’t mean he was wrong.”
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