By Schiff Gold
In her rate hike announcement last week, Janet Yellen said the Fed was so confident in the health of the US economy that it was raising the Federal Funds rate by a paltry quarter point. Investors are on board, with a wave of irrational exuberance sending the Dow closer to its 20,000-point milestone. However, the Fed's decision suggests the need for a strict comparison with its statements last December: a time when a similar expression of economic confidence would prove to substantially miss the mark for rate hike expectations and GDP growth.
In a special episode of the Schiff Report, Peter Schiff shows how the Fed's economic optimism is a ploy to maintain credibility with the markets and to cover up the fact that significant rate increases are impossible.
"The only reason the Fed raised rates this December is the same reason they did so last December: they did it despite having no confidence in the economy, but they didn't want to send a message that they were that worried. They raised interest rates by the smallest possible amount. They also did it to try and preserve their credibility when it comes to talking about future interest rates."
Highlights from the show:
"After 2 years of tightening, the lower bound of the Fed's range has gone from 0 to one half of one percent. Janet Yellen said the Fed made this decision to lift rates because of its confidence in the US economy. That is complete nonsense. If the Fed was confident in the US economy, rates would be much higher than a half a percent. The Fed would have raised rates a long time ago and by much more than this. In fact, they could have lifted rates by more than 25 basis points on Wednesday, yet they had so little confidence in the economy that this is what they did."
The Fed is now posturing the same way it did last year. It had forecast GDP growth for 2016 to be 2.4%, but the economy is going to end up growing below 2% per official numbers. "I don't think the economy is growing at all because I don't believe the official GDP numbers. They understate inflation, and therefore overstate growth." Even with that built in, we are not going to achieve the 2% the Fed anticipated. It'll be south of 2%.
"Janet Yellen indicated that she believed that next year in 2017 the economy would grow by 2.1%. So, the Fed is less optimistic about GDP growth now than they were a year ago. Given that, if the Fed was unable to deliver more than one rate hike in 2016, despite being more optimistic on 2016 than they are on 2017, why do people believe the Fed is going to be any more successful in raising rates this year when they failed last year."
"It's interesting that stock market investors and currency traders are more optimistic on US economic growth, far more optimistic than the Fed."
"The Fed overestimated what they thought the growth was going to be for 2016. I'm sure they're over-estimating it again for 2017. What the market has now that it didn't have then is it has to deal with the headwind of rising interest rates. Interest rates have already risen much more than the quarter point hike to the federal funds. If you look at the yields on 10-year or longer maturities, they have moved up sharply. Look at the increase we've already had in mortgage rates."
"Stock market investors are dismissing the increase in interest rates because they're counting on all this extra profit that is supposedly going to be coming as a result of faster growth that the Federal Reserve doesn't even see and hasn't even built into its forecast."
"The market wants to have it both ways. They want to pretend we're going to have all this economic growth, but they want to ignore the fact…that we would have an even greater tightening than we would if growth was slower."