There has been a growing sentiment in the markets that inflation isn’t transitory and the Fed is going to eventually have to tighten monetary policy to deal with it. The International Monetary Fund fed the narrative last week when Managing Director Kristalina Georgieva warned of a “sustained” inflation rise in the United States. This comes after a June Federal Reserve meeting that many perceived as a turn toward hawkishness. But in his podcast, Peter Schiff said the Fed is like the boy who cried wolf when it comes to fighting inflation and the markets are bracing for the wrong impact.
There was a pivot to safe havens last week. Peter thinks this growing sense that the Fed is going to start tightening sooner rather than later drove it.
If inflation is not transitory, if it’s sustained, well, everybody expects the Fed to do something about it. If it’s transitory, the Fed doesn’t have to do anything because it takes care of itself. But if it’s not transitory, now the Fed has to take action to reduce the rate of inflation. And that is what is spooking the markets. The markets are worried about the Fed taking action.”
There was also renewed focus on the June Federal Reserve meeting with the release of the minutes. It’s clear Fed members are starting to talk about tapering the bank’s asset purchase program. But Peter noted that if you read closely to what they’re saying, they’re telling you they’re not ready to taper.
Even though they are now talking about tapering, what they’re talking about is the fact that they’re not going to do it. What they’re saying is, ‘Yes, we’re talking about tapering, but the conditions that would result in a taper have not yet been met.’”
The Fed hasn’t stipulated exactly what those conditions are.
I don’t think they’re ever going to lay out the conditions because I don’t think there is any condition that would actually result in a taper. So, they don’t want to pin themselves into a corner by actually saying what it is that would cause us to taper because when those things happen, if they happen, and then the markets expect a taper and they don’t get it, well, then they lose some credibility.”
Keep in mind, tapering doesn’t mean shrinking the money supply. It just means expanding it at a slower pace.
They’re not talking about stopping the debt monetization, going cold turkey, and they’re certainly not talking about shrinking the money supply. They’re simply talking about inflating the money supply at a somewhat lower pace than they’re inflating it right now.”
Peter said the tone the Fed has taken should reveal to anybody with a brain that it is not going to taper. And if there really is an inflation problem, simply tapering wouldn’t be enough to deal with it anyway.
You’re still adding to the problem when you’re expanding the balance sheet. Even if you are adding to the problem more slowly, you are still fueling the fire. Even if you’re throwing on less fuel, you’re still giving the fire more fuel and it’s going to get bigger.”
The Federal Reserve isn’t even talking about what would actually be required to battle “sustained” inflation.
I think they recognize that there’s no way the markets could handle something like that, so they’re trying to give the markets a little bit of tightening but not too much to really scare them.”
In fact, talking about tightening affects the markets as if there was actual tightening.
The one thing the Fed doesn’t want to do is have rates go up. But it can’t admit that it’s never going to raise them. So, it’s trying to have its cake and eat it too by tightening without actually tightening. And they do that by just talking about tightening.”
But when the Fed talks about tightening, the markets think it’s serious. In effect, the markets start tightening for the Fed.
It’s like the Fed is this boy who cries wolf, and every time the Fed cries wolf, the villagers come running because they actually expect the wolf. They still don’t realize that it doesn’t matter how many times the Fed cries wolf — there’s never going to be a wolf. So, they can talk about, they can think about, they can do whatever they want about tapering and about raising rates, but they really can’t do it.”
Peter said the markets are bracing for the wrong impact. They’re worried about Fed tightening slowing down the economic recovery.
It’s not that inflation is going to turn out to be not transitory and therefore the Fed is going to fight it. It’s that inflation is not transitory and the Fed is not going to fight it. And because the Fed is not going to fight the non-transitory inflation, it’s actually going to end up getting much worse than people think. And the reason that they are not going to fight inflation in the future is the same reason they’re not fighting it now — because they can’t do it without collapsing the economy. They can’t do it without crashing the stock market, crashing the housing market and forcing the US government to dramatically cut spending or raise taxes on the middle class, two things that it is completely reluctant to do. So, since the Federal Reserve wants no part of any bitter-tasting medicine, even if ultimately it cures what ails us, they’re not going to fight inflation in the future, they’re not going to fight inflation now, they’re never going to fight inflation.”