The Fed FOMC minutes came out last week, signaling tighter monetary policy. Peter Schiff talked about the minutes in his podcast, arguing that the Fed can’t do what it says it’s going to do. If it does, it will crash the markets and the economy. And it won’t lower inflation.
The Fed minutes were widely viewed as even more hawkish than the messaging coming out of the December meeting. Peter said the minutes even surprised him a bit. But he reminded us that when he’s talking about a “hawkish” Fed, he’s not really talking about hawks.
“They’re extinct. They may as well be the dodo bird at the Federal Reserve. Everybody is a dove. We’re just talking about degrees of dovishness. And so, the Fed was less dovish than the markets had expected.”
The minutes indicated we could now see four interest rate hikes this year. Three hikes were widely anticipated after the meeting. That would push rates up to about 1% by the end of the year. In the big scheme of things, and against the backdrop of the current economic data, that’s not a lot.
“You cannot describe those itsy-bitsy moves in any way ‘hawkish.’”
But comments regarding quantitative tightening – shrinking the balance sheet – really roiled the markets.
“In other words, they’re going to go from being a massive buyer in US Treasuries and mortgage-backed securities to a seller of those securities. And that’s what really spooked the markets. Because that sent the bond markets tanking.”
Yields on the 10-year Treasury hit a 52-week high and briefly pushed above 1.8%.
If the Fed is going to shift from buying bonds to selling, clearly, that will put heavy pressure on the bond market. But Peter said there is one thing that the markets don’t seem to comprehend.
“If the Fed actually follows through with this plan, if they actually start to shrink their balance sheet, bonds aren’t going to just fall. They’re going to crash. They have a long way to decline.”
Peter said that’s why he doesn’t think the Fed will actually follow through with its tightening plan.
“I mean, sure, they can talk about it. But doing it is a whole different thing. But the markets still don’t understand how bad it would be.”
The only reason interest rates have dropped as low as they are is because the Fed has been massively intervening in the bond market and because a lot of people were under the impression there was no inflation. If we have 6.8% inflation, and the Fed is selling bonds, why would you expect yields on the 10-year to stay at 1.8%?
“If the Federal Reserve is no longer buying any Treasuries, and in fact, again, selling Treasuries, and the US government is selling Treasuries, and the various trust funds, like the Social Security Trust Fund, are also selling Treasuries, everybody is trying to unload low-yielding Treasuries. What private buyers are going to buy them? Nobody is going to buy a 10-year Treasury yielding 1.8% when there’s a 7% inflation rate.”
Even if inflation comes down to 3 or 4%, why would you want to loan money at 1.8%?
“So, the reality is if the Fed actually does what it says it’s going to do, the bond market would crash. Which, again, is why it’s not going to do it. The same thing with all of these rate hikes. If the Fed continues to raise rates, not just in 2022, but in 2023, the way they’re indicating, the economy is going to move into a recession. The stock market is going to move into a bear market. Something is going to happen that is going to cause the Fed to do an about-face.”
Peter said it’s just amazing to him that people can actually call the proposed Fed policy of gradual rate hikes as being hawkish or that it is in any way a tight monetary policy designed to fight inflation.
In 2002, the economy went into a recession that coincided with the bursting of the dot-com bubble and the 9/11 attacks. What did the Fed do in 2002 in order to “stimulate” the economy? It slashed interest rates — to 1%.
At that time, unemployment was 5.4%. The CPI was 1.58%. And GDP grew by 1.7% in 2002. Against that backdrop, the Fed was stimulating.
Today, the unemployment rate is 3.9%. GDP growth is projected to be 5.6% for 2021. And the CPI is at 6.8%.
“So, with these economic numbers, the Federal Reserve is proposing that it gradually raise interest rates so that by the end of the year they may be all the way back up to — 1%. The same rate of interest that was considered highly stimulative in 2002. Now, it’s considered tight money?”
When are people going to figure out that even if the Fed does what it claims it’s going to do, it will do nothing to cool inflation?
“Inflation is going to keep getting worse even if the Fed follows through with the rate hikes that it is projecting. And it may not even do that based on the weakness in the markets and the economy that will result.”
In this podcast, Peter also talked about the market reaction to the Fed minutes, inflation pressure continuing to build on producers and consumers, the impact of inflation on workers as prices rise faster than wages, Bitcoin, Micheal Saylor talking out of both sides of his mouth about the dollar and NASA agreeing that gold has intrinsic value.