Jerome Powell delivered his much-anticipated speech virtually during the Jackson Hole summit on Aug. 27. Peter Schiff talked about the speech during his podcast.
Everybody expected a hawkish speech outlining the Fed’s plan to taper quantitative easing. Instead, Powell tapered the taper talk.
The economic summit was titled “Macroeconomics in an Uneven Economy.” Financial analyst Jim Grant suggested a better title would be “Gasoline on Housefire,” or “Hoses in a Hurricane.”
“Because $120 billion dollars a month [in asset purchases] in an economy that is bounding and running with good health – the stock market is at all-time highs, 4,000-year lows in interest rates, and on and on – you wonder, why is the Fed still in crisis mode?”
Most people were anticipating Powell would use the moment to unveil the plan to begin a taper of quantitative easing. Up to that point, the taper was only talked about as a hypothetical. Even as the central bankers have hinted at tapering, the Fed has continued to monetize around $120 billion in debt every month. As Peter reminded us, a taper doesn’t mean the Federal Reserve will stop asset purchases altogether. It will just slow them down. A slightly looser monetary policy doesn’t mean tight monetary policy.
Leading up to the speech, several Fed presidents expressed their preference for a fall taper. The expectation was that Powell would echo those sentiments, but also put some teeth in them by clarifying exactly what taper would entail.
At this point, nobody has any idea how much tapering the Fed will actually do, or how long the first taper will go on before it cuts asset purchases further. And there is no hint on how long it will take to wind QE down completely. As Peter pointed out, this is important information to know.
“One of the reasons why it’s so important to understand the timetable for the taper and for QE eventually being wound down to zero is that everybody on the Fed, including Powell today [during his speech], has made it perfectly clear the first rate hike will not start before the taper ends and there’s no more QE. Think about that. The Fed is basically assuring the markets that interest rates are going to stay at zero until the Fed stops doing quantitative easing. And we have no idea how long it’s going to take before they ever end their QE program — if they ever end their QE program.”
Why is the Fed doing that? The central bankers keep talking about a strengthening economy. Yet rates are at zero and will likely stay there for months on end. If the Fed intends to raise interest rates, it should already be raising them.
“The fact that they’re pretending they’re not going to raise them until some point in the future once they finish their QE program to me says that the Fed knows that they’re never going to raise interest rates.”
The last time the Fed tried to raise rates, they didn’t get anywhere near normal.
“Now they’re not even trying because they’re leaving them at zero indefinitely. So, if the Fed created such an enormous problem back in the 2000s because it was too slow in returning rates to normal, think of the enormity of the problems that are being created now when the Fed isn’t even trying to raise interest rates back to normal. In fact, it’s not even trying to raise interest rates at all, and it’s leaving them at zero, which is lower than they were at any point prior to the housing bubble.”
Peter said the only reason the Fed would make this all-or-nothing bet on “transitory” inflation is if they know the bet is already lost. The Fed is damned if it does and damned if it doesn’t. If it raises rates now, it will create a financial crisis. If it waits until later, it will create an even bigger crisis. It seems the Fed’s only goal is to delay the crisis as long as possible.
“As long as crisis is inevitable, just delay it. And that is exactly what they’re doing, by pretending inflation is transitory. And to a lesser extent, that’s what they’re doing by pretending that at some point in the future, they’re actually going to raise rates when they really have no intention of doing that at all.”
Powell’s Jackson Hole speech really confirms this.
“Instead of getting this hawkish speech introducing the taper, this was the most dovish speech Powell could have possibly delivered. In fact, the word ‘taper’ wasn’t even spoken once. In fact, there was only one line in the entire speech that referred to the potential for a reduction in asset purchases. And the only thing that Powell said was that a reduction in the asset purchases this year could be appropriate. That’s all he said. He didn’t say it would be appropriate or that it is appropriate now. He simply said that it could be appropriate, which also means it might not be appropriate.”
If the plan was to taper, Powell had every opportunity to clarify that intention. He did no such thing. He spent most of the speech trying to convince everybody inflation really is transitory.
Powell goes on to talk more about Powell’s speech. He also covers gold stocks and the debacle in Afghanistan.