Fed doesn’t test for inflation during next recession, says Schiff

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Fed doesn’t test for inflation during next recession, says Schiff

Peter Schiff, chief economist and global strategist at Euro Pacific Capital, reminded Twitter users about his views from three years ago when he highlighted how the Federal Reserve'sFederal Reserve's stress test does not take into account the possibility of rising long-term rates and high inflation during the next recession.

In 2019, Schiff said that the central bank's stress tests aren't worthless. The most adverse scenario assumes inflation long-term interest rates fall. Inflation long-term interest rates will increase during the next recession. That is why the Fed doesn't test for it! He had said something.

The scenario assumes that inflation, measured as the quarterly change in the CPI and reported as an annualized rate, falls from below 3 -- 1 4 percent at the end of 2022 to about 1 -- 1 4 percent in the third quarter of 2023 to above 1 -- 1 2 percent by the end of the scenario.

At the same time, long-term interest rates are assumed to decline. He said that long-term interest rates, as measured by the 10 year Treasury yield, fall by nearly 3 -- 1 4 percentage points by the second quarter of 2023 and then gradually rise to about 1 -- 1 2 percent by the end of the scenario.

Benzinga's take: What are the chances that these assumptions will be sunk in the current economic environment? Is the long-term rate going to fall and inflation going to come down at a time when a recession occurs later this year? This is a question that most economists would be asking before considering an adverse stress test scenario. Schiff suggests that no major bank would survive stagflation.

Schiff's take: Citing his old tweet, Schiff took a sarcastic stance on what investors and Congress should have done instead of relying on the central bank in the wake of the banking crisis.

I warned on Twitter about what the Fed didn't test for almost three years ago. So instead of relying on the Fed, all Congress or investors had to do was follow me on Twitter and nothing that happened to SVB or SignatureBank, and nothing would surprise you, Schiff tweeted.

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