Start the conversation
Leave a Reply
Euro Pacific Capital CEO Peter Schiff at FreedomFest 2016
Euro Pacific Capital CEO and well-known economist Peter Schiff proposed an interesting theory about why the Fed raised interest rates last week.
In his special episode of the "Schiff Report" on Dec. 15, Schiff claimed that the Federal Open Market Committee (FOMC) only raised rates for one reason…
It didn't want to appear weak.
"If the Fed was confident in the U.S. economy, rates would be much higher than a half a percent. The Fed would have raised rates a long time ago and by much more than this. In fact, they could have lifted rates by more than 25 basis points on Wednesday, yet they had so little confidence in the economy that this is what they did," Schiff said.
Essentially, Schiff was pointing out that the Fed would have raised interest rates much higher – and much sooner – had it any faith in the economy.
"The only reason the Fed raised rates this December is for the same reason they did so last year. They did it despite having no confidence in the economy, because they didn't want to send a message that they were that worried," he continued.
Here's the odd thing about the Fed's decision to raise interest rates right now, according to Schiff…
Last year, the Fed announced an expected growth of 2.4% for 2016. That's higher than the forecast growth for 2017, which Yellen announced to be 2.1% last Wednesday.
Trending Now: The 3 Biggest Takeaways for You Now That the Fed Has Raised Rates
This percentage difference left investors like Schiff wondering why the Fed would raise rates when it seems like it's expecting 2017 to be an even worse year for growth.
Adding more concern to the issue is the number of rate hikes expected in the coming year. Yellen announced on Dec. 14 that the Fed expects three rate hikes in 2017.
But Schiff doesn't think these additional rate hikes are likely to happen. In fact, he sees the Fed's public proposal as just another futile plot to maintain credibility with the markets.
"I think the markets [next year] will be just as disappointed as last year, and the Fed will fail to deliver on this expectation," said Schiff.
And he isn't the only one questioning the Fed's policy decisions…
Money Morning Global Credit Strategist Michael E. Lewitt has long criticized Yellen & Co.'s interest rate policies.
"With interest rates barely above zero, and its balance sheet stuffed with debt, the Federal Reserve can't do much more to stimulate growth or bail out markets when they collapse," Lewitt wrote to investors recently. "The Fed has already fatally mismanaged this credit cycle, and negligible 25-point rate hikes won't change any of the underlying issues."
For more information about how these underlying issues will affect you and your money, check out this free report – exclusively for Money Morning readers.
Follow Money Morning on Twitter @moneymorning or Facebook.