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

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

The Federal Reserve left its policy rate unchanged, and Peter Schiff argues that this decision exposes a central bank that talks tough on inflation but refuses to act. With three FOMC members dissenting in favor of a hike and the bond market selling off hard, Schiff contends that the Fed has effectively chosen inflation over the economic pain that a real fight would bring.

According to Peter Schiff, Kevin Warsh’s hawkish rhetoric has not been matched by policy. The rate has stayed at 3.5% to 3.75% since December, the same range that held during the five months before Warsh took over, and Schiff says that the lack of any hike or balance sheet reduction makes the Fed’s inflation commitment look hollow. He argues that the $100 billion-plus monthly goods trade deficit and rising consumer pessimism reflect an economy too fragile to withstand real tightening.

Peter Schiff explains why he believes the Fed is trapped: the economy carries too much debt, so any serious attempt to replicate Paul Volcker’s tightening would trigger a worse crisis than inflation itself. In his view, markets will fall whether the Fed hikes or holds, and the sell-off in long-term Treasuries, with the 30-year yield reaching 5.22%, signals growing loss of confidence in the central bank.

Schiff also points to gold holding its ground while Treasuries fell, which he reads as a bullish sign. He contends that rising yields driven by inflation fears are good for gold, and that people who sell bonds and buy gold are responding rationally to a Fed that has surrendered to inflation.

Key takeaways

• The Fed held rates steady at 3.5% to 3.75%, with three FOMC members voting for a hike and Warsh siding with the majority to stand pat.
• Peter Schiff argues that Warsh’s tough talk lacks any corresponding action, with no hike and no balance sheet shrinkage.
• The 30-year Treasury yield hit 5.22%, its highest level in roughly twenty years, while the Dow fell about 2.2% and the Nasdaq 100 dropped more than 2%.
• Gold closed up about $40 near $4,070, and Schiff reads the bond sell-off as bullish for gold and bearish for the dollar.
• Peter Schiff warns that the Fed is damned either way: holding rates lets markets slide, and hiking would deepen the crash.
• Schiff also criticizes New York City’s proposed government-run grocery stores, arguing that 30% price cuts would require large taxpayer subsidies and drive private grocers out of business.