Peter Schiff Podcast: The Fed Up Fix Is In

| About: ProShares Inflation (RINF)

By Joel Bauman

This article was submitted by Joel Bauman, SchiffGold Precious Metals Specialist. Any views expressed are his own and do not necessarily reflect the views of Peter Schiff or SchiffGold.

It seems at least once a week, a Fed official is coming out of the woodwork to suggest the "possibility" of a September rate hike. Right now, investors are nearly split over whether or not that is likely to happen. What's really prompting this more aggressive posture by the Fed? In his latest podcast, Peter Schiff looks at the real motives behind the faux-hawkish statements from the Federal Reserve.

Basically, it comes down to a bait-and-switch move by the Fed to create some wiggle room for actually doing nothing. Here's an analogy: a fish monger tells his customers, "It's possible I will raise the price of fish." Since he's created the idea that a price increase is possible, he can now tell my customers, "I've decided NOT to raise prices." The fish seller wants his customers to appreciate how "inexpensive" the current price is. They will now feel as if they've gotten something ("inexpensive" fish) when in reality nothing has changed.

Highlights from the podcast

"The price of gold continues to retreat. Gold was down about $12 today; it closed around $1,310. The dollar index was up again as more and more people begin to contemplate the possibility of a rate hike in either September or December. Or maybe even both, because the odds of a rate hike, either in September or December have now increased to about even money."

"If you go back to June, the odds were practically zero. What has changed in the last couple of months? The only thing that has really happened is that you've had various Fed officials going out of their way to mention that a rate hike is still possible. Why would they do that?"

"Obviously, a rate hike is possible. Usually, they are asked the question and they mention the possibility. If the Fed had no intention of raising interest rates, I doubt they would admit it at this juncture. They want people to believe that a rate hike is possible because if you admit that it's not possible, that opens a can of worms that the Fed isn't interested in opening just yet."

"Even if we do get a rate hike in September, I bet the odds would drop sharply for another one in December. We would have one rate hike in 2016. We had one in 2015. The Fed is on a pace of one hike per year, although I doubt they will be able to maintain that pace in 2017 because they're going to be cutting rates by then for sure. The election will be over, and there will no longer be a need to pretend that there is still a recovery going on."

"The Fed wants to maintain the possibility of a rate hike so they can take away that possibility as their first real easing. That's like a rate cut. So if they change their forward guidance from 'a rate hike is possible' to 'a rate hike is probably not going to happen,' then they can say a rate cut is possible to actually cutting rates. Since they have so little wiggle room to actually cut rates, they want to have a lot of room to alter their forward guidance."

"By maintaining this possibility of a rate hike, they still have some dry powder in reducing the probably of that possibility or taking the possibility off the table. I still think they're trying to reserve that after the election."