The Federal Reserve won't raise interest rates for fear of triggering a recession that will hand the White House to Republicans in next year's election, says Peter Schiff, CEO of Euro Pacific Capital.
Deterioration in the jobs market and factory activity will dissuade Fed Chair Janet Yellen from raising borrowing costs for consumers and businesses, he says in a commentary on RealClearMarkets
. Yellen in the past few months has said repeatedly that a rate hike is coming later this year.
“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 says. “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.”
President Barack Obama two years ago nominated Yellen to take over the central bank. A Republican-dominated Senate last year confirmed her as chairperson, making her one of the most powerful women in the world, according to Forbes magazine
The Fed has held rates near zero percent
since 2008, when the U.S. economy declined the most since the Great Depression. The central bank also pumped trillions of dollars into the financial system by buying government and mortgage debt
in three “quantitative easing” programs.
“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 September non-farm payroll report
showed that the U.S. economy added 142,000 workers in September, missing Wall Street estimates for 203,000 jobs. The percentage of working-age Americans in the labor market fell to 62.4 percent, the lowest in 38 years, as 579,000 people gave up looking for a job, according to the Bureau of Labor Statistics.
The S&P 500 rallied more than 3 percent after the jobs report on Oct. 2 as investors speculated that the Fed will push back a rate hike. The delay will mean a weakened U.S. dollar and rally in commodities, Schiff says.
“Once the threat of rate hikes is finally and officially taken off the table, the Wall Street rally will continue,” he says. “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.”
Eric Rosengren, president of the Federal Reserve Bank of Boston, still expects the central bank to raise interest rates by December despite the jobs report, according to a Reuters report
"This was definitely a weak employment report," he said to the newswire. "We need to understand whether (it) was an anomaly or whether it was symptomatic of greater weakness in the economy than we were expecting. One report alone doesn't tell us that, so we'll have to see the incoming data."
The unemployment rate held steady at 5.1 percent in September, while the percentage of workers who are working part-time and want a full-time job fell to 10 percent, the lowest since May 2008, from 10.3 percent.
Rosengren said he would delay hiking rates until next year if the data are “weak enough that either the unemployment rate is going up, or that growth looks like it's going to be less than 2 to 2.5 percent, over the second half of this year," Reuters reported.
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