Peter Schiff: The Fed Let Inflation Live

On Wednesday’s episode of the Peter Schiff Show, Peter responds to the Federal Reserve holding–rather than hiking– rates yet again. He walks through recent producer prices, GDP, and mortgage activity data to show why these signals mean real rates are likely to turn negative again, a dynamic that favors gold and punishes the dollar. The Fed blinked, and the economy will suffer for it.

He opens by noting the Fed did exactly what the market expected, but not what the economy needed, and he sets the stage by pointing to the inflation and producer-price data that set the tone for markets before the Fed’s announcement:

Well earlier today the Federal Reserve did exactly what everybody expected them to do, including yours truly, and that was leave interest rates unchanged. The Fed funds rate remains at three and a half to three and three quarters. Of course the right thing to have done would have been a substantial rate hike, but of course that did not happen. But what I want to discuss before I get into the details of the Fed’s decision and the press conference that followed, I want to talk about some of the economic data that came out before we got the news that really set the tone for the markets, particularly the precious metals markets.  

He pivots to growth, pointing out the mismatch between political rhetoric about a booming economy and the reality in the GDP numbers, which he says tell a different story about the pace of economic activity:

I went over the GDP numbers which shocked everybody in how weak it was; Q4 GDP grew at just 0.7 annualized, not even one percent economic growth. Donald Trump is talking about this economic boom, this miraculous turnaround that he has presided over, and growth is anemic. In fact, for all of twenty twenty five GDP grew at two point two percent, that’s twenty percent below the two point eight percent GDP growth from Biden’s last year when we supposedly had the worst economy in the history of the world.  

Next he focuses on producer prices and why a monthly 0.7 percent rise matters more than many realize; he reminds listeners that producer prices tend to feed into consumer prices later, and he explains the link to the consumer price index (CPI), the main gauge of retail inflation:

The actual number was 0.7 percent increase, 0.7 more than double the upper end of the consensus forecast. Think about that number for a minute: 0.7; if you annualize that, unlike GDP numbers that we get—this is not an annualized number—prices were up 0.7 percent on the month, so if they did that every month you would be looking at like 8.4 percent inflation. Now this is not consumer prices, these are producer prices, but obviously if prices are going up for producers what are they gonna do? They’re not gonna eat it, right, they’re gonna raise their prices.  

He then lays out the policy implications: the Fed’s inaction validates his long-held view that inflation never died, and he walks through the math showing how rising inflation with only modest rate hikes crushes real interest rates — a recipe that traditionally boosts gold and weakens the dollar:

This is not bearish for gold nor is it bullish for the dollar. What this does is validate what I have been saying all along, what I have been saying for years, because the Fed has been wrong, Wall Street has been wrong, the Trump administration has been wrong, I’ve been right. What I’ve been saying is that inflation is not dead and buried, it’s alive and well, that it is going to make a comeback, that it never really went away because the Fed never put out the flame; it aborted the fight prematurely.  

He also points to the housing market as an early casualty of policy contradictions, noting that mortgage applications and refinances are falling even as government-sponsored enterprises intervene to support rates — an unsustainable props-and-discount scheme that risks losses for Fannie and Freddie if the bubble bursts:

The purchase market is gonna be drying up because mortgage rates are rising along with bond yields and that’s despite the fact that the GSEs purchased $200 billion worth of mortgage backed securities in order to artificially suppress mortgage rates to keep bubble-like home prices from deflating. If you remember I was saying that this was impossible to do; you can’t really privatize them unless you’re willing to let mortgage rates go up which Trump doesn’t want, so he wanted to have his cake and eat it too. 

Finally, Peter draws a stark comparison with the 1970s-era inflation crisis, warning that today’s heavy short-term debt profile leaves the government dangerously exposed to a return of high rates. He runs the numbers on what 10 percent interest would mean for debt service and tax receipts, and he suggests the fiscal math simply doesn’t add up:

The comparison between now and the 1970s is that we have all this short-term debt. So if interest rates just went to 10 percent … How are we gonna pay 10 percent on 40 trillion in debt? That’s $4 trillion a year in interest. The government only collects 5.4 trillion in taxes, but how much tax revenue would the government collect if interest rates were 10 percent? A fraction of what it is now.

Want more of Peter’s analysis? Check out his latest interview on the Triangle Investor!