Peter Schiff thinks Fed will surrender to inflation.
Fed Chair Jerome Powell and Janet Yellen now Secretary of the Treasury and former Fed Chair testified before the US Senate recently (March 23) regarding the state of the economy one year on from the pandemic. The economic fallout from the pandemic and lockdowns has resulted in millions of jobs being lost and thousands of small business closures.
But the message the Federal Reserve and Treasury Department had for congress last week is that it could have been worse, and there is still a long way to go.
“message the Federal Reserve and Treasury Department had for congress last week is that it could have been worse, and there is still a long way to go”
WEALTH TRAINING COMPANY
The Fed will keep its liquidity tap open to help finance an unprecedented three trillion USD in public spending, and that could be why Peter Schiff thinks Fed will surrender to inflation
Approximately, 15% of the US economy, valued at 20.93 trillion (2020) is now driven by public spending, which is partly financed by selling treasury bonds.
Inflation was a big topic of discussion with The Fed insisting that it can take on inflation if need be.
“But that isn’t a problem we need to worry about right now” said Powell.
Getting the economy back to firing on all cylinders appears to be what the Fed is zeroing in on, bearing in mind that at least 9.5 million jobs are still missing from the labor force.
So, the Fed now has got bigger fish to fry and is tailoring monetary policy towards economic recovery, Inflation is on the radar but it is not yet a pressing issue is the message being sent by the Fed.
“But that isn’t a problem we need to worry about right now”
JEROME POWELL (on dealing with inflation)
But Peter Schiff’s take is that the Fed is underplaying the inflation problem, moreover, Peter Schiff thinks Fed will surrender to inflation because it is a fight it doesn’t want to take on.
“The truth is inflation is a problem. And when it comes to dealing with that problem, the Fed is in a box. It will never pick a fight that it can’t win,” said Peter Schiff.
The Federal Reserve’s independence was also discussed. Powell talked about how important it is for monetary policy to be unfretted by politics. But Peter believes that the actions of the Fed chair show that the idea of Fed independence is a myth.
“There’s independence in form only, but not in substance. We pretend we have an independent Fed, but in reality, the Fed acts as if it’s just a branch of the US Treasury Departmentk,” he said. “The fact that both the secretary of the Treasury and the Fed chairman are testifying together shows a degree of cooperation. They’re working together and it seems that they are trying to coordinate their policies” he added.
“The reason the Fed is keeping interest rates so low and expanding its balance sheet is to accommodate the US government as it spends more and more money” – Peter Schiff
Peter Schiff thinks Fed will surrender to inflation and keep interest rates and yields suppressed to help finance the 3 trillion dollars expansionary public spending
“The reason the Fed is keeping interest rates so low and expanding its balance sheet is to accommodate the US government as it spends more and more money” said Peter Schiff.
“So clearly, the Federal Reserve is acting in concert with the Treasury to advance the Biden agenda, which is exactly what they were doing when Trump was there” added Peter Schiff.
This notion of Fed independence is “laughable” said Peter Schiff.
“When you get down to it, none of them act as if the Fed is independent and none of them are willing to deliver the bitter-tasting medicine that will cure the economy of what truly ails it” he said.
The Fed is unlikely to use the tools at its disposal to combat inflation, which is why Peter Schiff thinks Fed will surrender to inflation
Fed Chair Powell said that the economy could experience transitory inflation in services as the economy opens up and emerges from the pandemic lockdowns. “You can only go out to dinner per night” said Powell recently. The Fed chair is referring to the short-term demand-pull type of inflation.
But what the market could be concerned about is another type of inflation, monetary inflation due to the devaluation of the US currency which has been brought about by an increase in the money supply (M2). Currency depreciation leads to an increase in input costs, which leads to cost-push inflation.
“what could lie ahead is a bull market with a rocky ride where the bulls run in “go” periods, then are sent in retreat in stop periods”
– Wealth Training Company
One senator popped the question, what tools the central bank has if inflation turns out to be not transitory?
Powell then gave the usual canned response, saying the Fed can raise interest rates and shrink the balance sheet by selling Treasuries in the open market.
But raising interest rates, selling treasury bonds will increase yields, raise borrowing costs and that could be toxic for a generation of businesses, households, and government who rely on readily available and inexpensive finance.
The recent turbulence in the bond market morphed into a stock sell-off and a 20-billion-dollar margin call, which set off a wave of forced selling, bearing in mind investors are already highly leveraged, which threatened to topple the financial dominoes.
In bouts of euphoria, investors tend to be leveraged and are more exposed to volatility, which could also be why Peter Schiff thinks Fed will surrender to inflation
With so much leverage in the system, the market is vulnerable to volatility.
So, Peter Schiff thinks Fed will surrender to inflation but I believe that what we could see is stop-go monetary policy, where the Fed alternates policy between fighting high unemployment and high inflation.
In the 1970s, the Fed pursued what economists would call “stop-go” monetary policy. During the “go” periods, the Fed lowered interest rates to loosen the money supply and target lower unemployment.
In other words, what could lie ahead is a bull market with a rocky ride where the bulls run in “go” periods, then are sent in retreat in stop periods