The Federal Reserve released the minutes from its most recent FOMC meeting on Wednesday, and it appears the monster it created has finally spooked the central bankers.
The Fed was pretty optimistic about the prospects for continued economic growth, but expressed concern that financial markets might be getting out of hand.
"In light of elevated asset valuations and low financial market volatility, several participants expressed concerns about a potential buildup of financial imbalances," the minutes said. "They worried that a sharp reversal in asset prices could have damaging effects on the economy."
The central bankers at the Fed aren't the only ones worried about the ballooning stock market bubble, although they don't call it that. Last week, a Bank of America analyst called overvalued equities combined with simultaneously falling cash positions "an indicator of irrational exuberance."
In his most recent podcast, Peter Schiff said it's about time the Fed noticed the monster it's created.
I mean, this is like the Frankenstein finally getting a little worried that his monster might do some damage and he's coming to warn the village people, 'Look out!'
Peter noted that the Fed isn't really concerned that the stock market is a giant bubble. It's just worried the air might come out.
If [asset prices] are too high, they should come down. And the reason they're too high is because the Fed propped them up. So, now they're saying they're worried what might happen if they go down, which is another reason they want to make sure we have inflation because that also benefits the stock market.
Some of the Fed members did indeed take a cautious view of inflation according to the minutes. Janet Yellen reflected that view in comments she made before the minutes even came out, warning that the central bank should be wary of raising interest rates too fast.
It can be quite dangerous to allow inflation to drift down and not to achieve over time a central bank's inflation target.
Peter Schiff took umbrage at that comment:
Dangerous? Dangerous to whom? … Why is inflation being 'too low' dangerous? … What is dangerous about prices not going up? I mean this is all a bunch of nonsense that the media just accepts. Now, I'll tell you why it's dangerous and for whom it's dangerous. See, the reason the Fed wants high inflation is so the next time they cut interest rates they can create a negative rate because they know that the bubble is so big that just lower interest rates are not going to do anything, right? This addict is so hyped up on this sauce that we have to get rates negative. Low interest rates are not enough. They've got to be negative.
From a technical standpoint, the Fed would need to get the funds rate below the inflation rate - possibly way below. So if inflation is only at 1% and it goes to zero with the interest rate, it only has -1. That's not enough.
They might think we need -3 or -4. Well, if zero is the lower bound and you want rates to be -3, well then you need to have inflation at 3% in order to get a -3% yield, unless you want to go from the absurd and to the ridiculous and actually take rates negative, which would have major ramifications for the reserve currency to have negative interest rates.
It's important to remember that rising inflation isn't just some abstract economic statistic. It means prices are going up. That means you are paying more for everything you buy.
They are willing to sacrifice American families. They are just casualties of war - collateral damage in the Fed's war, and their ridiculous manipulation and their experiments, because they're saying that we need to have higher inflation so we can fight the next recession. Well, the next recession is going to be a lot worse if in addition to unemployment, people are dealing with a rising cost of living. But as far as the Fed is concerned, well, that's OK.
Peter touched on another reason the Fed wants to keep inflation up. It's the only way to deal with the massive level of debt - both corporate and government.
They're counting on inflation to wipe out debt because no one has the integrity to default. So, they need to wipe it out surreptitiously and they want to do it through inflation. So that's another reason that maybe the Federal Reserve believes low inflation is dangerous because we have all this debt and we're counting on inflation to wipe it out. But of course, if you own the debt, and you're owed the money, you don't want inflation. You don't want to get your asset wiped out. So, it's not dangerous to you. It's just dangerous to the borrower who's counting on inflation to bail him out.
Unrestrained monsters are most certainly dangerous. It seems the Fed has noticed its monster, but it doesn't seem to realize just how dangerous it is - nor does it take any responsibility for creating it.