Exclusive: Peter Schiff At SALT 2015: What's Wrong With The Fed's Forecasts?

Speaking at the SALT Conference in Las Vegas, Peter Schiff took issue with the Federal Reserve's GDP forecasts, calling into question why the central bank has been consistently overestimating economic growth during the past eight years it has issued forecasts.

Schiff pointed out that in the eight years of GDP forecasts, the Federal Reserve has only hit actual growth once, despite offering large ranges for economic performance. The one year that the Fed did correctly predict economic performance, Schiff said, was in 2010 when growth came at 2.5 percent, compared to a range of 2.5 to 3.5 percent from the Fed.

Other than that, however, the Fed has missed the mark. In 2015, for example, the Fed forecasted growth of 2.5 to 3.0 percent. With the dismal, 0.2 percent annualized growth in the first quarter, that would mean that growth in the remaining three quarters would have to average 3.4 percent annualized.

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Schiff's Three Scenarios

Schiff outlined three scenarios that would lead the Fed's forecasts to be so wrong, none of which make the central bank look good.

First, he said that the "benign explanation" is that the Fed "failed to anticipate a string of unfortunate events" that ultimately conspired to dampen the economic recovery. That string of events included European debt crisis, high energy prices, and the Polar Vortex, among other factors.

The second answer, a "troubling possibility," is that the Fed simply doesn't understand how its tools impact the economy. Instead, the Fed thinks that its "medicine will cure the patients." Since the Fed thinks that zero interest rates and quantitative easing will stimulate consumers to buy and businesses to hire, it is biased towards a "favorable outcome," by way of higher economic growth.

Finally, Schiff said that there could also be a "more sinister possibility" that the Fed itself is "not really forecasting at all but cheerleading." 

Schiff said that it only stands to reason that if the Fed was inaccurate, some of those inaccuracies would be in under-estimating growth. Instead, the Fed consistently over-estimates GDP. Dubbing it the "field of dreams recovery," Schiff argued that the Fed may be reluctant to offer accurate forecasts because it believes that it might impact behavior, becoming a self-fulfilling event.

What Does This All Mean?

Schiff said that the Fed (and the market) will need to abandon "fantasies about a 2015 recovery," with the suggestion that it would lead rates to be lower for longer than the market currently expects. His final advice: "With these assumptions baked into portfolio dispositions investors risk being caught wrong footed when the ugly truth is finally accepted."

Read the original article at Euro Pacific Capital.