Schiff: Is The Fed Easing Up On The Inflation Fight?
Is the Federal Reserve easing off the accelerator on its inflation fight?
The answer depends on whether you believe your eyes or your ears.
Our eyes tell us the Fed is slowing down on rate hikes.
After easing back from a 75 basis point hike in November to a 50 basis point hike in December, the Federal Open Market Committee (FOMC) delivered an even smaller 25 basis point hike at its February meeting. With the most recent rate increase, the target range for the federal funds rate is between 4.5 and 4.75%.
A quarter-percent rate hike was widely anticipated. The mainstream narrative is that inflation has peaked and the central bank is now easing its foot off the accelerator.
But if our eyes tell us the Fed is winding down the inflation fight, the messaging coming from the central bank says the opposite. The FOMC statement said, “Inflation has eased somewhat but remains elevated,” and it signaled additional rate hikes in the future.
The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.”
As it did in the last two meetings, the FOMC left wiggle room to pivot, saying the committee will continue to take into account “cumulative tightening” and “the lags with which monetary policy affects economic activity and inflation” as it makes future decisions.
During his press conference, Powell repeatedly said “the job is not done,” and emphasized that “It would be very premature to declare victory, or to think that we’ve really got this.” He indicated that the central bank could raise rates a couple more times.
We’ve raised rates four and a half percentage points, and we’re talking about a couple of more rate hikes to get to that level we think is appropriately restrictive. Why do we think that’s probably necessary? We think because inflation is still running very hot.”
Answering another question, Powell said, “It’s our judgment that we’re not yet at a sufficiently restrictive policy stance, which is why we say that we expect ongoing hikes.”
On the other hand, Powell also gave himself some wiggle room, saying that he does see inflation easing.
We can now say I think for the first time that the disinflationary process has started. We can see that and we see it really in goods prices so far.”
Powell continues to insist there is a path for the central bank to bring price inflation down to 2% without causing a significant economic slowdown. He brought up the “strong” labor market several times during his press conference.
The markets appear to believe what they’re seeing, not what they’re hearing.
Despite what Powell actually said, the mainstream seemed to read between the lines and initially took the outcome of the FOMC meeting as confirmation that the tightening cycle is nearly over.
Stocks see-sawed after the announcement. The Dow initially sold off before swinging some 170 points to the upside after Powell’s press conference ended. The Dow slid into the close, finishing up 8 points. But the NASDAQ with its more speculative stocks closed up 2% on the day, and the S&P 500 finished up just over 1%.
Gold surged by over $20 and pushed over $1,950 an ounce. The dollar fell, along with bond yields.
All of this indicates that the initial market take was that the Fed is nearly finished raising rates.
Allianz Investment Management senior investment strategist Charlie Ripley told CNBC that the messaging leaned “slightly dovish,” adding that a lack of clarity on future interest rate moves signals the Fed is nearing the end of its rate tightening cycle
The Fed is essentially speaking out of both sides of the mouth as they signaled further increases are appropriate, but also acknowledged they will consider the cumulative amount of tightening in future policy decisions.”
In an interview on Fox Business, Peter Schiff said he heard a lot of economic ignorance coming out of Powell’s mouth. He said the “disinflation” that Powell mentions is “transitory.”
Schiff zeroed in on a comment Powell made claiming consumer expectations cause inflation.
“Inflation is caused by the government,” he said. “It’s caused by the Federal Reserve printing money and Congress spending it.”
Schiff said even if the Fed delivers a couple more 25 basis point hikes, it’s still not enough to slay inflation. He noted that even with the rate hikes, Americans continue to borrow money in order to keep up spending and saving has fallen into the basement.
Peter said he believes we are heading toward a major economic downturn, but even that won’t slay the inflation dragon.
No matter what’s going on in the Fed members’ heads, right now, I think the inflation fight will end the moment something breaks in the economy.
And I’m convinced something will break in the economy.
Powell insists there is a path forward that brings inflation down while avoiding a recession. I think that’s wishful thinking or bureaucratic spin. I think it’s a virtual certainty that the economy will spiral into a downturn. And I don’t think it will be short and shallow. I think it will be deep and prolonged.
My pessimism is rooted in the fact that the US economy is addicted to easy money. It is addicted to artificially low interest rates and quantitative easing. You can’t take an addict’s drug away without sending him into withdrawal. The economy can only limp along so long with tighter monetary policy.
Interest rates haven’t been this high since 2007. At that point, the Fed was cutting rates due to the housing bust. The economy couldn’t handle interest rates that high.
Powell and Company have backed themselves into a corner. They just don’t know it yet (or more likely, they haven’t admitted it).