The Fed has moved the inflation goalposts.
The central bank will no longer focus on keeping a lid on inflation. In his podcast, Peter Schiff said this policy will simply speed up the destruction of the dollar and the economy.
Jerome Powell announced the new policy during his speech in Jackson Hole last Thursday. In the past, the central bank has targeted a 2% inflation rate as measured by CPI. Now it will shift to “average inflation targeting.” In effect, the Fed will allow the CPI to run “moderately” over 2% “for some time” to balance out periods where it runs under that level.
“Many find it counterintuitive that the Fed would want to push up inflation. However, inflation that is persistently too low can pose serious risks to the economy,” Powell said during prepared remarks at the summit.
Of course, when you define inflation correctly – as an expansion of the money supply – it is anything but “too low.” In fact, it is at the highest level in history. But based on the CPI number, inflation has been well below 2% for many years. That means that the Fed will likely hold interest rates at zero for a significant amount of time – probably years – even if CPI runs above 2%. As Peter put it – the Fed has effectively raised its inflation target, but we don’t actually know what that target is.
It’s kind of a moving target. So, if we’ve had all these years of below 2% inflation – and again, I’m using the word inflation the way the Fed uses it, not what it actually means, so I’m not referring to the expansion of the money supply but the increase in consumer prices that results from that expansion, that inflation. But given that the official CPI has been below 2% for all of these years, the only way to bring the average up to 2% is for the Fed to now target an inflation rate above 2%. So, that’s really what the Fed has done. It’s not that they just said we want inflation to average 2%. What they’re saying is they want future inflation to be higher than 2% so that we can average out all of this low inflation that we’ve had in the past.”
Fed inflation policy has evolved over time. The natural tendency in a healthy economy is for prices to decline. So originally, the Fed’s goal was “price stability. Early on, the central bank simply tried to keep prices from rising or falling. Eventually, it shifted to a 2% ceiling. It didn’t want rising prices, but it would tolerate them as long as they stayed below 2%. Next, 2% became the target. And now we’ve reached the next step in the evolution.
Peter said the 2% target never really made any sense. Why is 2% inflation better than 1%?
The bottom line is what no one seems to understand is all of this is BS. The Fed is just making stuff up because it is in a predicament of its own creation. What the Fed has done with all of its prior monetary stimulus is to create a situation where the Fed can never actually fight the inflation that it creates. That’s why the Fed is now saying we’re going to let inflation run hotter – because they have no choice. It’s not because this is good for the economy. It’s not. It is necessary to keep the bubble from deflating. So, if the Fed’s goal is to prop up the stock market, to prevent the stock market from coming down, then they need more inflation. Because it’s inflation that’s propping the stock market up. The same thing with the real estate market and the bond market. And in fact, if the Fed wants to enable large government deficits, if they want to enable the government to keep borrowing money, then the only way to make that possible is to keep creating inflation because the Federal Reserve needs to monetize this debt by printing money, by expanding the money supply, by creating inflation, which of course is going to put upward pressure on consumer prices.”
The question nobody is asking is what will the Fed do if inflation heats up too much?
What if it gets too hot? How is the Fed going to put out the fire? It can’t. It’s impossible, which means the Fed has to constantly move the goalposts on its mission. So, the question is: what’s next? What are they going to say once the average rate of inflation is well above 3%?”
Wall Street loves this pivot because the Federal Reserve is basically saying not to worry about it raising interest rates. Government officials love it because this is what politicians need in order to keep spending money with reckless abandon. The only way politicians can give people something for nothing is if they pay for it through inflation.
Now, of course, the public doesn’t realize that inflation is a bill they are going to have to pay. That enables the politicians to continue to fool the public into thinking that they’re getting something for nothing. But we’re not getting anything for nothing. In fact, all of this extra inflation is going to damage the real economy. The ultimate irony of this is that the Fed allowing money to lose value, allowing people’s savings and wages to lose purchasing power, is not good for the economy. It may be good for the stock market in keeping a bubble inflated and keeping prices high. It may be good for maintaining the illusion that we have economic growth because we’re measuring that growth in nominal terms and not adjusting it for the decline in the value of money. But it’s not good for the economy.”
The bottom line is the Fed can’t fight inflation. That’s the reason for all this posturing. That’s why it has to move the goalposts. It has to pretend it can do something about inflation – if necessary – but then convince us that it’s not necessary. Peter said at some point the market is going to call the Fed’s bluff and ultimately the dollar is going to be destroyed.
In this podcast, Peter also talked about how Fed monetary policy exacerbates wealth inequality, the mainstream and market reaction to the Fed’s announcement and how this will ultimately impact the dollar.