As expected, the Federal Reserve nudged interest rates up another 25 basis points to 2.5% during its December meeting this week. It also scaled back its projected hikes in 2019 from three to two.
Peter Schiff said Jerome Powell and company just stuck a fork in the stock market.
Even though the central bank appears to be slowing its tightening pace, most analysts thought Powell came off more hawkish than expected. Many analysts thought the Fed would signal a pause in 2019 or indicate that it would take a “data dependent” approach.
Stock markets tanked on the hawkish tone. The Dow Jones dropped 351.98 points and hit a new low for 2018. The selloff from the high of the day to the low was nearly 900 points.
Peter pointed out this has been the worst December for the Dow since 1932.
“If something is happening that hasn’t happened since the beginning of the Great Depression, A you know that it’s rare, but also it could be the warning sign of something ominous.”
Powell justified continuing on the tightening path – albeit at a slightly slower pace – because he remains wildly optimistic about the US economy. Powell and company are ignoring all the data pointing to trouble.
“But of course, the stock market blowing up is a pretty good indicator, because in case Powell hasn’t noticed, the stock market and the economy are pretty much joined at the hip. And if they weren’t there naturally, the Fed joined them.”
Ben Bernanke explicitly said that the goal of quantitative easing was to push asset prices up. As a result, people would feel wealthier and spend more money. Therefore, they could borrow more based on the increased value of their assets.
“So, the entire recovery was built on an asset bubble. Intentionally. Not even by accident … That was the intent of the policy – to inflate asset prices. So, now that asset prices are deflating, if you know that the recovery was the result of asset prices going up and now asset prices are collapsing, what does that tell you about the recovery? Obviously, the recovery is going to go away too because so go the asset markets so goes the asset-based economy. But for some reason, the Federal Reserve hasn’t figured this out yet. Or maybe they have figured it out and they’re just lying about it.”
Peter said Powell made two statements during his post-FOMC press conference that really put a fork in the stock market. First, Powell said the Fed would absolutely continue with quantitative tightening – i.e. shrinking its balance sheet. The winddown is on autopilot, the Fed chair insisted. Second, Powell walked back his previous statements that interest rates were near neutral. He said what he meant is that we are nearing the lower range of neutral.
This threw a big bucket of cold water on investors and the Trump administration who were all saying even though the economy is great, the central bank needs to stop pushing interest rates higher. Peter said too many people want to have it both ways.
“Well, you can’t have your cake and eat it too. It’s either the economy is great and the Fed should hike or the economy is not great and that’s why the Fed shouldn’t hike. You can’t have it both ways – claim we have this great economy, the greatest economy in the history of the country and then say that we can’t raise rates above 2% because this great economy can’t handle a two-and-a-quarter percent interest rate. The reality is this is the biggest bubble the Fed has ever blown and this bubble is so big that it can’t handle a two-and-a-quarter percent Fed funds rate.”
A lot of people don’t want to admit that the economy isn’t strong, but the fact that they don’t want the Fed to raise rates proves that it isn’t strong. There are some who do recognize the economic weakness. They don’t want the Fed to raise rates because they know it’s going to cause a crash. But Peter said ultimately, we need to take the medicine and let the economy normalize.
“There is no way out of this. There is no correct Fed policy to avoid a crash. The correct policy is going to precipitate a crash. But even the incorrect policy is going to precipitate a crash. It just might precipitate it a little bit later. But by postponing the pain, we end up exacerbating the pain.”