The Federal Reserve is gradually raising interest rates. Although the U.S. central bank plans to raise rates three times this year, the market is beginning to pencil in a total of four in 2018. A rising-rate environment is bad for a few groups, particularly borrowers and the stock market.
After a decade of historically low rates and immense expansion on the New York Stock Exchange, it looks like the good times are coming to end. At least according to contrarian investor Peter Schiff.
Speaking at the Orlando Money Show, Schiff stated that the artificially low interest rates propped up the economy, the stock market, and all of the debt. When you add rising rates to the massive budget deficits, you have an economic crash and a deep recession.
“When we got the tax cuts passed, that is a huge negative for the bond market because it means much bigger deficits, because now the government has to borrow the money it used to collect in taxes. But now they just passed this new budget resolution, which is a massive increase in spending,” he said.
“The budget deficits now, under Trump, are actually going to be bigger than they were under Obama when we were in the worst recession since the Great Depression. This is unprecedented borrowing. And when Obama was running these big deficits, the Fed was monetizing them. They were doing a trillion dollars a year of QE. Now, they’re not doing any.”
The Fed has started to unwind its $4.5 trillion balance sheet, and it looks like the Fed will stay on course.
But Schiff contends that the Fed will reverse course: cancel the rate hikes, launch a fourth round of quantitative easing, and boost the balance sheet yet again.
“So, that means we’re going to have a massive increase in interest rates. That means stocks collapse. That means we’re going into a recession. Because the only thing that has been propping up the economy and the stock market has been artificially low interest rates – extremely, unprecedentedly low interest rates,” Schiff said.
“I think it’s only a matter of time before the Fed cancels the rate hikes, fesses up to rate cuts and launches QE4. But the problem is it ain’t gonna work this time. It’s going to blow up in their face because that is basically the nail in the dollar’s coffin.”
Whether it happens under new Fed Chair Jerome Powell or a possible successor remains to be seen.
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