Photo by Etienne Martin on Unsplash

Most people now seem to think the Federal Reserve can beat price inflation and guide the economy to a soft landing. In his podcast, Peter Schiff explains why most people are wrong. The Fed is actually in a no-win situation. And if the Fed can’t win, gold can’t lose.

The Federal Reserve released the minutes from the July FOMC meeting last week. They revealed that many of the FOMC members still think the inflation fight is far from over.

With inflation still well above the Committee’s longer-run goal and the labor market remaining tight, most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy.”

Peter said they should be worried about an upside surprise with inflation.

I’ve been saying to take your eyes off the rearview mirror and look at everything that’s happening in the windshield. Forget about the fact that the CPI has gone down from nine to three. We’re now going back up.”

Video Length: 01:00:31

During his press conference after the July meeting, Federal Reserve Chairman Jerome Powell gave markets some hope that rates could come down next year — even before the central bank hit its 2% target. But as Peter pointed out, if the FOMC members are still concerned about upside inflation, that means the Fed will have to reassess cutting rates next year.

In fact, the Fed might actually have to raise rates more than they thought. In other words, it might not just be one more rate hike. Maybe the Fed has got to go up to 6%. Maybe they’ve got to go higher than that.”

This spooked the markets last week, and we saw a pretty significant selloff in both stocks and bonds. Gold also fell below $1,900 an ounce. Peter called it a “buy area.”

Bond yields have risen close to the high point in this cycle. And as Peter pointed out, they should be higher given the amount of debt in the economy.

Tax hikes can’t make it through Congress. Nobody wants to cut spending. So, the fiscal situation that we’re in is far more precarious than it was back then [the last time yields were this high]. Rates should be higher.”

Meanwhile, the Atlanta Fed recently raised its GDP forecast for Q3 to 5.8%.

“I can’t even remember the last time we had a 5.8% quarter,” Peter said, pointing out this doesn’t look like a “soft landing.”

That isn’t landing at all. That’s the plane still up there in the air, right? You’re not landing at 5.8%. You’re not even close to the runway. Now, a lot of people would think if the economy is this strong, well, the Fed can’t cut. In fact, the Fed has to hike. We’re going to have more inflation. Because you still have all these Keynesians out there who think that inflation is a byproduct of economic growth, and if we’re going to have this booming economy, well, then we’re going to have the trade-off of higher inflation.”

Peter said that’s the messaging he hears coming from the mainstream financial media.

As if slowing the economy is what’s going to bring down inflation. It’s not. The truth is if they really want to bring down inflation, the consequence is going to be that the economy weakens. It has to,  because we have a bubble economy that is based on debt. Everybody is loaded up with debt and it’s all based on excess consumption. The American economy is about spending more than you earn. We have elevated that to an art form.”

Americans have a comparative advantage in shopping.

That’s the easy part. The hard part is making all the stuff. Working in the factories; that’s the hard part. Anybody can go to a store and bring stuff home.”

Peter said the only way to fight inflation is to reduce spending.

You’re not trying to weaken the economy. You’re trying to stop the spending.”

In reality, we don’t want to put people out of work. Working people add productivity.

Remember, inflation is about too much money chasing too few goods. So, the more people who are working, the more goods they are producing. So, we want people to work. We just don’t want them to spend. We want them to take what they earn and save it. That’s how you bring down inflation. You get more production and you get less consumption. So, you get more goods and less money.”

Meanwhile, you want fiscal responsibility. You want the government to cut its spending so demand goes down.

You don’t want the government to give people money to go out and buy stuff.”

You also need consumers to quit borrowing. That’s the whole point of rate hikes. You want borrowing to be too expensive.

It’s all about more savings and less spending. That’s how we bring down inflation. Well, the Fed is not accomplishing that at all because the rate hikes have been too little to accomplish that, and they’ve had no help from the government because the government is spending and borrowing like there’s no tomorrow.”

When you boil it all down, it’s clear that the Fed needs to initiate much bigger rate hikes.

Since the narrative is we just need a weaker economy, positive economic data is viewed as bad news. Peter said that’s because Wall Street has one thing right: interest rates need to come down. This economy can’t function long-term in a high interest rate environment.

But the way people perceive the Fed’s outlook is the main thing driving the markets right now.

Everybody just cares what these guys think. If they’re scared of inflation, which they should be – they should be a lot more afraid of it than what they’re publicly admitting – it’s a game-changer for the markets. And the markets are already skating on thin ice. The markets were already ignoring all kinds of bad news and shrugging it off because they were looking for these rate cuts to bail them out. Well, maybe the bailout isn’t going to come as soon as they think.”

Peter said this is why he’s patient with gold.

We can’t go on for many more years. The numbers at this point are just so astronomically big. And again, the only thing that’s keeping gold from exploding is this idea that the Fed is going to succeed in bringing inflation back to 2% and a soft landing. They’re not going to do either, but they have to do both. But the markets are confident that the Fed is going to pull this off. It’s not going to happen. The markets are completely wrong. And so gold is priced for something that is not going to happen.”

Even if price inflation does come back down and there is a recession. The Fed will cut rates. The budget deficits will keep getting bigger. The central bank will go back to QE.

That’s bullish for gold. Even if inflation comes down with a weak economy that’s bullish for gold. But if inflation goes up, that’s bullish for gold too, as long as the Fed stops fighting it, which eventually they have to do. Because if inflation keeps going up, the economy is going to collapse. The Fed can’t keep raising rates. It’s like a game of chicken. At some point, the rate hikes are too much for this overly indebted economy to bear. We are all levered to the max. It can’t happen. The Fed is in a no-win position. And when the Fed can’t win, gold can’t lose.”

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