As expected, the Federal Reserve nudged rates up another .25 basis points on Wednesday. Perhaps more significantly, the Fed took a more hawkish tone than expected, signaling it would likely increase rates two more times this year for a total of four hikes. The central bank had been projecting three 2018 rate increases.
A buildup in inflation pressures was a major reason for the Fed's more hawkish tone. According to the latest data released by the Bureau of Labor and Statistics, the Consumer Price Index (CPI) jumped by 2.8% year over year in May. The central bankers projected inflation will likely run above their 2% target into the near future. Analysts expect the CPI to hit 2.1% this year and run at that level through 2020.
In his latest podcast, Peter Schiff said higher inflation might be a victory for the Federal Reserve, but it will be a big loss for consumers. In fact, we are heading for a no-growth, high-inflation economy.
Peter said he doesn't think he's ever heard a Fed chairman so bullish on the economy. That might not be good news.
"Given the fact that the Fed is a pretty good contrarian indicator as far as being reliable, if Powell is extremely bullish, as bullish as a Fed chairman has ever been, it likely means that the best days of so-called growth are behind us and it is all downhill from here."
While everybody is taking up the Fed's hawkish stance, Peter said he thinks the Fed is actually pretty dovish when it comes to inflation if you read between the lines. In fact, Powell said it was too early to "declare victory" on inflation and he wants to make sure it doesn't drift back down.
"As if victory over inflation is defined by lifting the inflation rate up to 2%. I mean, that's not a victory. Do you think consumers are going to celebrate that?"
In fact, it's not hard to generate inflation. Just print money. The hard part comes when inflation runs out of control and the central bankers have to bring it down. That's real victory - a victory Peter said Powell will never achieve.
"Not that he's not going to see inflation breaking out. He's going to. Inflation is going to skyrocket, and the Fed is not even going to try to bring it back down, because they know it's impossible to do, at least not without destroying the entire house of cards economy they've been so carefully erecting over the years. So there will be no real victory."
The only way to control inflation is to push interest rates much higher. Paul Volker gave us the blueprint in the 1980s. He brought inflation under control - but the process also crashed the stock market. This Fed won't likely be willing to do that. And consider this: the interest rate is only at 2% now. Peter said even this relatively low rate will have bigger ramifications for the bubble economy than anybody believes. Ultimately, he sees a recession on the horizon. At that point, the Fed will reverse course.
"Powell was saying if we see evidence that the rate hikes are hurting the economy, well we can always do something about it. Yeah. By the time they acknowledge that the rate hikes have hurt the economy, or are hurting the economy, it all will be in a recession. And then, of course, it's going to be too late to do anything about it - as if they could have done anything about it anyway. What are they going to do? They are going to reverse course. They are going to start cutting rates from wherever they got them - however high they made it, they're going to start slashing them pretty quick. But they're not going to have a lot of room to go between where they get to and zero, and so they're going to have to launch QE4. That is what's coming."
So, how is the Fed's message on inflation dovish?
The old policy was, "We want to have 2% inflation." In fact, the Fed's mandate is to have 'stable' prices. So, initially, the Fed said its goal was to keep inflation below 2%. If it was 1%, that was still within the mandate because one was lower than two. Then it moved the bar. The Fed said, "Well, our goal is 2%," meaning if it's not 2%, it has to actively work to raise it to that level.
Now they've moved the bar again. Now they don't want to get to 2%. They want to get to 'symmetrical' around 2%, meaning that we were below 2% for a while, now we need to be above 2% for a while. So again, this is the Fed moving the bar again to accept higher rates of inflation because they know they're powerless to do anything to bring it back down. And now the Fed is going to have ample cover to talk about or allow inflation to be above 2% because nobody knows when it's 'persistent,' because there's no set definition of how long - how many months or years."
So, this sets the stage for dovishness. The Fed has created an excuse not to raise rates significantly higher even if inflation creeps up.
Peter said ultimately we are heading toward a slow-growth or no-growth, high-inflation economy.
We have massive amounts of debt. What hope do we have of paying it off? None! So, the only way to get out of it without admitting that we can't pay it and defaulting, which I put a very, very low probability of US politicians ever doing anything honorable. So, it's going to be inflation. That's the policy."
This might be some kind of victory if you're a central banker, but it's bad news if you are an average consumer trying to make ends meet.