The Last Thing the Fed Wants

Peter Schiff spoke with CNBC Asia last night about why the consensus is wrong – the Federal Reserve is not going to raise rates significantly in September. And if it does, it will likely drop them back down to zero before too long. Instead, Peter argues that investors should be preparing for a fourth round of quantitative easing.

Follow along with this transcript of Peter’s responses:

“I was listening earlier. You had a guest on that said the Fed is trying to raise rates in. I think that’s the last thing the Fed wants to do – is raise rates. Of course, the second to last thing they want to do is admit that they can’t raise rates. If the Fed wanted to raise rates, they would’ve done it years ago. They keep talking about how they’re waiting for improvements in the labor market, yet they pretend they’re maybe going to raise rates in September. The labor market is not going to get any stronger between now and September. If anything, it might get weaker. We had a pretty bad private sector ADP payroll number today. Just 185,000 jobs. The goods producing sector – the most important sector – particularly weak. Just 2,000 manufacturing jobs created. And the labor force participation rate just hit a new low… The lowest of this cycle…

“They can’t admit that they’ve inflated a gigantic bubble and it needs a constant supply of air in the form of zero percent interest rates and, I think, more quantitative easing. They have to pretend that they’ve created a legitimate recovery. That doesn’t need this monetary support. If they admitted that they are never going to raise rates, then the dollar would tank and that would send long-term interest rates much higher and the Fed doesn’t want that. So in order to have their cake and eat it too, they keep talking about how they’re getting ready to raise rates, but never actually raise them and have to deal with the consequences. Which would be another financial crisis…

“I think just the absence of QE is enough to push the economy back into recession. In fact, if you look at growth in the second quarter – GDP – it’s about half of what it was in the second quarter last year. The economy is rapidly decelerating. In fact, growth for all of 2015 is probably going to be the weakest of the recovery. So if the fed couldn’t raise rates last year when the economy was much was much stronger than it is this year. And by many measures the labor market was stronger last year, because you had more participation than we do this year. And look at wages in the second quarter. This isn’t nominal wages. Wages even adjusted for inflation grew by just two tenths of a percent. That’s the lowest increase since 1982, when they first began tracking this statistic. So the Fed is looking for wage growth. We don’t have it…

“Remember, they used to think it was March, then June, now September. And pretty soon they’ll be saying December. But of course too, if they do raise rates – I’m not saying it’s impossible that they’re going to go to 0.25. They could do it just to put on the show. But there’s a good chance that if they raise rates this year, the next move is good to bring them back down to zero. It’s is not to be to raise them again. And of course, that raises a lot of credibility which is why I think it is a bad decision for the Fed given what they’re trying to do is raise rates. Of course, they should have raised them a long time ago and allowed the economy to implode, because it’s a phony economy. It’s a bubble. We need to let this bubble burst. So we can build a real recovery, a real economy on savings and investment that creates a higher standard living, good paying jobs – all the things that the Fed is preventing.

“But to answer your question what do you do to protect yourself? Look, the dollar has had a huge rally based on the anticipation of the normalization of interest rates, of the shrinking of the Fed’s $4.5 billion balance sheet. All this is wrong. None of this is gonna happen. It’s all fantasy. That balance is going to explode when they launch QE4. So the dollar is a bubble. You should sell dollars. Gold has been suppressed because people have been buying dollars and selling gold. Gold is a great buy, gold stocks. And you’ve had a nice correction, I think, in your part of the world. In Hong Kong, some of these Chinese shares. I think there’s a lot of opportunities there to look to protect yourself from the equity markets. Because when the Fed unleashes QE4, that’s going to send a lot of money into the emerging markets. A lot of money is going to leave the US in search of safe havens…”

Reprinted from SchiffGold.com.