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’s stress test does not take into account the possibility of rising long-term rates and high inflation during the next recession.
Back in 2019, Schiff said that the central bank’s stress tests are “worthless.”
“The most adverse scenario assumes both inflation & long-term interest rates fall. During the next recession, both inflation & long-term interest rates will rise. No major bank will survive stagflation. That’s why the Fed doesn’t test for it!” he had said.
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Adverse Scenario: Indeed, it is worth noting that the 2023 stress test scenario published on the Federal Reserve’s website considers a decent fall in inflation under a severely adverse scenario.
“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 and then gradually increases to above 1-1/2 percent by the end of the scenario,” the scenario assumes.
At the same time, long-term interest rates are also assumed to decline. “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 in late 2023 to about 1-1/2 percent by the end of the scenario,” he said.
Benzinga’s Take: What remains to be seen is the probability of these assumptions panning out under the current economic environment. Will long-term rates fall and will inflation come down at a time when a recession occurs somewhere later this year? This would be the question most economists would be asking themselves before considering an adverse stress test scenario. Otherwise, as Schiff suggests, no major bank may survive stagflation.
Schiff’s Take: Citing his old tweet, Schiff took a sarcastic stance on what investors and Congress should have done instead of depending on the central bank in the wake of the banking crisis.
“I warned on Twitter precisely about what the #Fed failed to 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 would have come as a surprise,” Schiff tweeted.
