One of the reasons why the Federal Reserve will not raise interest rates over the course of the next year is because the central bank fears hiking rates will cause a recession, and thus give the keys to the White House to the Republicans in 2016, says Peter Schiff, CEO of Euro Pacific Capital.
Writing an op-ed in RealClearMarkets, Schiff opines that the lackluster labor market and the deterioration of factory activity will prompt Fed Chair Janet Yellen to refrain from increasing borrowing costs for both businesses and consumers.
This comes as Yellen has regularly hinted that a rate hike is coming in the next few months, and perhaps even this year. Yellen was nominated by United States President Barack Obama to succeed Ben Bernanke. Once the senate confirmed her nomination, Yellen became one of the most powerful women in the world.
“If weakening conditions prevent the Fed from pulling the rate hike trigger by December, can we really expect it to do it in the election year of 2016?” Schiff wrote. “Does anyone really expect the left-leaning Federal Reserve led by Janet Yellen to do that? We may not see a rate increase until 2017, even if conditions improve, which is a dubious proposition.”
Instead of raising interest rates for the first time since 2006, the Fed, according to Schiff, will unleash a new dose of quantitative easing.
“It is far more likely that we will see a fresh round of quantitative easing before we see a rate hike,” Schiff says. “The Fed has created a phony ‘bad is good economy’ and we are not about to snap out of it any time soon.”
The stock market rallied after September’s labor numbers showed just 142,000 jobs were added, which were short of the 203,000 estimate. Investors saw the writing on the wall that a rate hike would be delayed. Schiff believes this will cause the greenback to weaken and incite a rally in commodities.
“Once the threat of rate hikes is finally and officially taken off the table, the Wall Street rally will continue,” he added. “But those gains will be attenuated by a weaker dollar and depressed earnings by domestically focused companies. In that case, it may be better to search for stocks outside the dollar and for the potential benefit of rising share prices and a rising currency.”
Many financial experts project declines in the U.S. dollar index (chart courtesy of MarketWatch).
Meanwhile, gold is trading at just under $1,150 per ounce and silver is trading at $16.
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