Wall Street Tycoon: Interest Rate Cuts are the Only Way for the Federal Reserve to Save Itself

Senior Wall Street investor and renowned economist Peter Schiff published the following article

U.S. inflation has risen again. You might not be surprised, and neither are we.

In fact, over the past few months, we have repeatedly stated that inflation will continue to rise, even identifying some strange reasons for it.

Remember the surge in used car prices at the beginning of the pandemic? Supply chain disruptions and stay-at-home orders hindered major automakers from producing enough new cars. As a result, demand for used cars skyrocketed, and prices for used cars soared.

However, used car prices eventually began to decline. Throughout this year, government inflation reports have shown a sharp drop in used car prices, with year-on-year declines of up to 10% to 12%.

We have made two points about this:

1) The significant decline in used car prices has essentially dragged down the average inflation rate. Other prices, such as housing and healthcare, are still rising at a rate of 5% or higher, but after averaging out the 10% drop in used car prices, the overall inflation rate seems to be decreasing.

2) We have also said that this is only temporary. Used car prices can only fall for so long before reaching a "normal" level. Once this happens, inflation will begin to rise again.

It now appears that this situation has occurred.

For example, in the summer of this year, used car prices fell by 10.9% year-on-year in July. Then in August, the year-on-year decline slowed to 10.4%, and further slowed to 5.1%. The recently released data for October shows that the used car price index fell by 3.4%.

In other words, the "used car deflation" effect that has been dragging down government inflation reports is nearing its end. Therefore, we see the inflation rate rising again from 2.3% in September to 2.6% in October, which is no coincidence.

Many categories have seen increases far exceeding 2.6%, especially items that people frequently purchase. Health insurance rose by 6.8%. Auto insurance increased by 14%, airfare rose by 4.1%, housing costs increased by 5.2%, and daycare costs rose by 6%.

Of course, some categories have clearly seen price declines. If you wanted to buy a men's sports jacket last month, then congratulations, you spent 5.9% less. Additionally, the crucial category of "dishes and tableware" saw a price drop of 7.4%. However, these declines are hard to offset against the significant price increases in key categories that are essential for most people.

This is the strange aspect of the Federal Reserve's policy actions.

Last week, they cut interest rates again, marking the second rate cut in this cycle... which is precisely the opposite of what central banks typically do when inflation is rising. Just as they pretended throughout 2021 that inflation was "transitory," they are now asserting with the same vigor that the inflation beast has been tamed.

In fact, they are so filled with self-satisfied arrogance that Federal Reserve Chairman Powell stated he would refuse to resign if Trump asked him to Please remember that Powell is the one who completely misjudged inflation in 2021. He thought inflation was temporary and did not take action in time, only starting to seriously raise interest rates in mid-2022. Then, he failed to predict any negative impacts from the rate hikes, including the collapse of the U.S. banking system.

Just two days before the bankruptcy of Silicon Valley Bank last year, Powell even testified before Congress that he believed "there is no data" indicating any risks in the Federal Reserve's monetary policy decisions.

I also want to point out that during Powell's tenure as chairman, two of the highest-ranking officials at the Federal Reserve were found to have profited from their monetary policy decisions through suspiciously timed stock trades. It was almost like Nancy Pelosi was managing this institution.

Powell has been making significant mistakes, and now he insists that he will not step down. Clearly, only he can lead the Federal Reserve. Such arrogance is something we have also seen in Biden, Tony Fauci, and others.

This does not look good and is not a good omen for the Federal Reserve.

Putting that aside, the Federal Reserve is clearly in a bind. Inflation is rising, so they should realistically raise interest rates. However, the interest rates—even at the current levels—are choking the federal government.

In the last fiscal year, the U.S. spent an incredible $1.1 trillion on interest payments for national debt. This figure is almost certain to increase in the current fiscal year. If interest rates remain at their current levels, total interest expenses will exceed $2 trillion in a few years.

Considering that interest rates are still relatively low historically, this situation is quite dire. But this is not just a problem for the federal government. The current interest rates are also unfavorable for banks.

Remember, banks across the U.S. purchased a large amount of U.S. Treasury bonds during the pandemic—when interest rates were at historical lows, and the yields on those bonds were only 5 basis points (i.e., 0.05%).

Due to the Federal Reserve's rate hikes, the value of these banks' bond portfolios has plummeted. (When interest rates rise, bond values fall.) In fact, the total unrealized bond losses across the entire U.S. banking system exceed $500 billion. This accounts for about 20% of the total capital of the U.S. banking system.

Naturally, banks do not want to bear such losses. The only way to recover these losses is for interest rates to decline, allowing bonds to appreciate again. So yes, banks are also eager for interest rate cuts.

But the most important factor is still the Federal Reserve itself.

Just as banks across the country purchased U.S. government bonds during the pandemic, the Federal Reserve also bought trillions of dollars in bonds. Their rate hikes have caused unimaginable losses to the Federal Reserve's own bond portfolio.

How large are their losses? About $1 trillion.

In other words, the Federal Reserve is severely insolvent. At this point, they are merely acting in self-preservation.

Lowering interest rates is the only way to reduce these unrealized losses and support their solvency, even if it means more severe inflation... possibly even worse stagflation than in the 1970s This is particularly important because Powell admitted at the last press conference that the Federal Reserve has no contingency plan to deal with stagflation. They haven't even considered the risks. They are just focused on sacrificing your interests to save themselves.