Investors have long been fixated on the word "patient," which the Federal Reserve removed from its statement Wednesday following a two-day FOMC meeting. But stocks rallied and the dollar fell as the Fed also lowered its forecasts for growth and inflation. That suggested to investors rate hikes are coming later rather than sooner.
Peter Schiff, CEO of Euro Pacific Capital says the word "patient" was always a straw man and that the economic data suggest the "tightening in 2015 narrative" doesn't hold water. He says don't expect a rate hike this year.
“The Fed has been bluffing the entire time,” says Schiff. “It has no intention of raising rates. But it can’t come clean and admit that, so it has to pretend that it is going to do something it’s not going to do,” he believes, “so it doesn’t reveal the fragility of the U.S. economy.“
Schiff has long maintained there hasn’t been a recovery in the economy. Recent economic data like retail sales, housing starts and industrial production have helped his case. But the labor market is strong. The economy has been adding more than 200,000 jobs to the economy each month for more than a year, and unemployment has dropped to 5.5%.
Schiff says those employment numbers don’t tell the whole story. “I don’t think people leaving the labor force in disgust because they can’t find jobs is a good sign,” he says. “So many people are settling for part-time jobs and low-paying jobs. We have college graduates—some with masters’ degrees-- cooking French fries part-time. That counts as a job. But I don’t think that guy thinks he’s employed.”
The Fed says it needs to see further improvement in the labor market and inflation to hit that elusive 2% target. Schiff believes inflation is going to approach and exceed 2% but he doesn’t think the Fed will do anything. “They will move the goal post like they did with unemployment. They used to say if the unemployment rate got below 6.5%, that’s when we’re going to raise rates. Well it’s at 5.5% and they are still waiting,” he says.
Schiff believes the Fed will be just as tolerant toward inflation. When inflation hits 2.5 or 3%, Schiff believes there still will not be a rate hike. “But believe me when it’s officially at 3% it’s going to be a lot higher than that,” he says, “and consumers are really going to be feeling the pain.”
So when does Schiff think a rate hike is coming? Schiff believes Janet Yellen and company “will raise rates eventually.” But, he says they will do so "not because they want to, but because they have to, because the markets will give them no choice, because I think what we will have is a currency crisis.”
Schiff is predicting QE4 and the collapse of the dollar. He says eventually the Fed’s back will be up against the wall. “They are going to have to jack interest rates way up and you know all hell is going to break loose,” he says. “It’s going to make 2008 look like a Sunday school picnic.”