Janet Yellen Gets Nuts – Ep. 125

The Peter Schiff Show Podcast

Yesterday, the Federal Reserve finally met market expectations and increased interest rates to .25% Actually, the official rate was 0 - .25 and now, the official rate is .25 to .5 The actual rate was always in the middle between zero and .25 Assuming the Fed tries to keep the rate closer to .25 than .5, the actual increase in rates could be less than 25 basis points The initial reaction to this rate hike is to proclaim the end of the era of "cheap money" .25% is still cheap money. Alan Greenspan never went below 1%. Some people are saying "Peter Schiff was wrong" because the Fed did raise rates Actually, in a recent podcast I noted that the Fed changed their narrative away from "data dependent" to an expression of faith in the economy, opening the door to a symbolic rate hike unsupported by data I was alone throughout the year believing that the Fed would not raise rates prior to this change in narrative The Fed was afraid that to not raise rates this year, it would be a vote of "no confidence" in the economy Ultimately, the Fed felt that even though the data didn't justify it, they had to raise rates because of psychological damage to the markets If the economy were really sound, we would not need Janet Yellen to express confidence in the economy - a strong economy creates its own confidence. We don't need propaganda in the form of a symbolic rate hike The Fed did not even have the last recession in their forecast until we were well into the recession, so who cares about the Fed's level of confidence? In an earlier podcast, I referred to Ben Bernanke's comment that he felt he was a representative of the administration Janet Yellen is creating a sense of confidence in the economy for the same reason The Fed is now pretending that we will have more rate hikes in the future, forecasting 4 more hikes during 2016 I believe the economy is not strong enough to accommodate these rate hikes and neither does Janet Yellen The ultimate irony is the data that came out the morning of the rate hike Industrial Production: they were forecasting a drop of .2, which is still bad, instead, we got a drop of .6 The PMI Manufacturing Index was the lowest in many years, 51.3 down from 52.6 More bad news: The Philadelphia Fed last month showed an increase of 1.9, so 1.2 was forcasted - instead we dropped 5.9 These numbers show an economy that is decelerating If you look at a chart, these numbers are about to crash even lower These numbers are flashing recession, recession, recession If you're a Keynsenian, the prescription for the condition this economy has would be stimulus, not an interest rates The air was coming out of this bubble anyway, all the Fed did was increase the hole for the air to come out The market was up just before the hike, which was interpreted as a green light to raise rates. I said in an earlier podcast that that would be a mistake, because the market would then tank, and that is what happened today Transports have been the weakest of all, despite oil prices We continue to see weakness in the high-yield bond market as the air is coming out of that bubble It is probable that the stock market is going to get a lot worse between now and the time the Fed is supposed to hike rates again But the problem for the Fed now, is if the market starts to tank now, they can't do anything until the jobs numbers begin to show weakness Janet Yellen actually referred to this move as "ahead of the curve", meaning that if she waited any longer, she would overshoot on her objectives: One was unemployment. How can that get too low? Especially with so many people out of the labor market, is she worried about the economy creating too many jobs? She is talking about the outdated Phillips Curve, which states that too many people with jobs creates inflation Then she said we might overshoot on GDP - meaning that if interest rates didn't go up, the GDP would be too strong.