The Fed Is Proving How Much It Got Wrong

The Fed Is Proving How Much It Got Wrong from Schiff Gold

There’s that word again — patient.

Jerome Powell once again emphasized patience during the most recent FOMC meeting. The Federal Reserve left interest rates unchanged and took any hikes for 2019 off the table. It went a step further and projected just one rate hike in 2020.

During his most recent podcast, Peter Schiff said most people expected a dovish Fed, “But I don’t think they were expecting the Fed to be this dovish.”

“In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes,” the central bank said in its monetary policy statement.

Patient…

During his post-meeting news conference, Powell said, “It may be some time before the outlook for jobs and inflation calls clearly for a change in policy,” Powell said. “Patient means that we see no need to rush to judgment.”

Powell also said the Fed will freeze bond sales from its $3.8 trillion balance sheet later this autumn. In other words, the balance sheet reduction program that was on “autopilot” just six months ago is done.  As Peter said, despite all the talk about normalizing its balance sheet and shrinking it back down to the size that it was before the 2008 financial crisis, the Fed didn’t even get anywhere close.

Peter said the increasingly dovish tone comes as no surprise to him.

The only thing that surprises me is how long it took for the Fed to get here … The only reason I think it took this long was because of the election of Trump. I think this pushed back these admissions by a couple of years as the Fed was able to take cover in all the enthusiasm that resulted from Trump making America great again, and the tax cuts, and all the stimulus, and all the positive outlooks for change and all that.”

Peter said this delay was actually unfortunate because the delay allowed the underlying problems to get much worse while the central bank kicked the can down the road.

So now, we have a much bigger problem. We have a much bigger crisis in our future as this problem comes to a head, you know, when the Fed finally has to go back to zero, when the Fed has to go back to QE4, which the Fed is still not admitting that they’re going to do.”

In fact, despite the increasing dovishness, the Fed still hasn’t admitted that there are any real problems in the US economy.

Meanwhile, the pundits on the financial networks were generally applauding the Fed’s recent trajectory. Peter said nobody acknowledges the real problem here.

The Fed is not getting it right. What the Fed is doing now just proves how much they got wrong in the past. The reason the Fed had to abort the process prematurely is because they couldn’t finish it. The reason they had to stop raising rates was because they couldn’t keep raising them because we have too much debt. The reason they had to call off the reduction of their balance sheet was because they can’t do it. The Fed can’t do what they were pretending they were going to be able to do the entire time.”

Peter said the Fed was able to convince people that its policy not only worked, but it could actually unwind it. He said it was like believing you could get drunk, quit drinking, and then stay high.

The Fed did not create a sustainable recovery. They simply inflated a bubble, and the air is already coming out of that bubble. That is why the Fed has made these changes. That is why it did the 180-degree switch. That is why the Fed is now ‘patient.’ It’s not because circumstances have changed. That’s just the excuse that I knew they would come up with from the very beginning.”

The Dow initially rallied on the Fed statements, but sold off late, closing down about 141 points. Peter said this indicates that there isn’t much upside left in the stock market when it comes to the “Powell Pause.”

I think the bear market rally that the Fed created with that unexpected policy shift has pretty much run its course, and that there’s really nothing the Fed can do on this path to get the markets to go higher.”

Gold was up on the Fed news. As we reported yesterday, a Fed shift to neutral policy has historically been good for gold.

Peter also touched on the Fed’s view of inflation and oil prices. Listen to the whole podcast for more in-depth analysis.

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Peter Schiff

Mr. Schiff began his investment career as a financial consultant with Shearson Lehman Brothers, after having earned a degree in finance and accounting from U.C. Berkeley in 1987. A financial professional for more than twenty years, he joined Euro Pacific in 1996 and served as its President until December 2010, when he became CEO. An expert on money, economic theory, and international investing, he is a highly sought after speaker at conferences and symposia around the world. He served as an economic advisor to the 2008 Ron Paul presidential campaign and ran unsuccessfully for the U.S. Senate in Connecticut in 2010.