The Fed Just Chose Inflation... And the Bond Market Called Its Bluff

Peter Schiff

13,466 views • Save 55 min (5 min read) • 4 hours ago

Video Summary

The Federal Reserve maintained its policy rate, a decision widely anticipated but met with criticism for its perceived inaction on inflation. Despite hawkish rhetoric from Fed Chair Jerome Powell, the decision not to raise rates is seen by some as a choice to tolerate higher inflation rather than risk market instability. This inaction has led to a loss of credibility for the Fed, particularly in the bond market, where yields have risen significantly, signaling investor concern about persistent inflation. The market's reaction was mixed, with initial rallies followed by sell-offs, indicating a lack of confidence in the Fed's strategy.

Further analysis suggests that the Fed's reluctance to hike rates stems from a fear of triggering a recession or market crash, a trade-off the current leadership appears unwilling to make. This approach is contrasted with the aggressive stance of Paul Volcker, whose actions, though painful, ultimately curbed inflation. The current situation leaves the economy in a precarious position, with markets anticipating further volatility regardless of the Fed's future actions.

Short Highlights

The Federal Reserve kept its policy rate unchanged, despite some expectations of a hike.
Critics argue this inaction signals a tolerance for higher inflation.
Bond yields rose significantly, indicating market concern about inflation.
The Fed's credibility is questioned due to the disparity between its words and actions.
The market experienced volatility, with initial rallies followed by sell-offs.

Key Details

Fed Maintains Policy Rate [00:37]

The Federal Reserve announced it left its policy rate unchanged, a widely expected decision.
There was a 30% probability of a quarter-point rate hike, which would have been insufficient.
A larger rate hike, along with balance sheet reduction and money supply contraction, would be needed to meet the 2% inflation target.

"The fundamentals are we have so much debt. This whole economy is such a massive bubble that if we actually tried to do what Paul Vulkar did, we would create an economic condition much worse than what they perceive the threat to be from inflation."

Powell's Rhetoric vs. Action [02:18]

Fed Chair Jerome Powell's prepared remarks praised the economy's resilience and the FOMC's performance.
He reiterated the Fed's resolve to bring down inflation to the 2% target.
Critics argue Powell's rhetoric is "all bark and no bite," with actions not matching his words.

"The fact of the matter is, and I've been saying this from the beginning, he's all bark and no bite. He can talk the talk and he talked it again today but he can't walk the walk and the markets now are starting to take notice of what I have been talking about."

Market Reaction and Credibility [16:16]

The markets focused on the Q&A session, interpreting the Fed's actions (or lack thereof) as a sign of weakness.
Powell expressed satisfaction with long-term interest rates moving higher, seeing it as a sign of markets not being "cheated" by forward guidance.
However, rising bond yields, particularly the 30-year Treasury reaching a 20-year high, signaled investor concern about inflation.

"The markets thought there was a 30% chance of a rate hike. Why not deliver one?"

Fed's Dilemma and Inflation Choice [20:52]

Reporters questioned Powell on what he was waiting for, given the persistent inflation and the Fed's stated commitment to the 2% target.
Powell's repeated use of the "magic wand" analogy was seen as an excuse for inaction.
The speaker argues the Fed is "choosing inflation" by not taking decisive action to raise rates or shrink its balance sheet.

"Well, so far all you're doing is talking, right?" "What are you waiting for?"

Market Sell-off and Gold's Role [28:07]

The bond market sold off, leading to a stock market decline, with the Dow closing down 2.2%.
Gold, however, rallied, seen as a safe-haven asset in times of economic uncertainty and loss of confidence in the Fed.
The speaker posits that rising bond yields due to loss of confidence in the Fed are bullish for gold.

"The bond market sold off and that's when the stock market rolled over. So, the market closed on the lows of the day."

Government-Run Grocery Stores Criticized [42:46]

The podcast shifts to discuss a plan for government-owned grocery stores in New York, aiming for 30% lower prices.
The speaker argues this is economically unfeasible due to low margins in the grocery sector and the inherent inefficiencies of government-run businesses.
This initiative is predicted to lead to significant taxpayer losses and harm the private grocery industry.

"How is Mandami going to run his stores so that he could charge 30% less?"

Capitalism vs. Socialism [55:15]

The speaker contrasts free-market capitalism with socialism, asserting that capitalism is the most effective system for distributing goods and services.
Government intervention, like the proposed grocery stores, is seen as detrimental and inefficient.
The argument is made that capitalism creates opportunities and abundance, lifting people out of poverty.

"The bottom line, and this is what the socialists don't get, is the free market does a great job of uh of distributing goods and services at the highest quality and at the lowest price."

Bitcoin's Resilience and Future Outlook [59:49]

Bitcoin's relative resilience is noted, remaining just below $64,000.
However, the speaker expresses skepticism about a significant rally, suggesting it may be a trap before a further decline.
The overall market sentiment remains cautious, with questions about the Fed's ability to combat inflation without severe economic consequences.

"I I I don't think that this means that Bitcoin is setting up for a big rally. Uh, I I just think it's ultimately going to give way."