Why Divided Congress Will Likely Perk Up Inflationary Pressure: Gold Bull Peter Schiff Weighs In

Recent inflation data has raised hopes of the Federal Reserve slowing the pace of its rate hikes and pivoting subsequently. Results of the U.S. midterm election have poured cold water on this hope, according to economist Peter Schiff. 

What Happened: The Republicans have gained control of the House of Representatives and the Democrats retained Senate control, giving rise to worries of gridlock.

The real risk is, however, bipartisan compromise, Schiff, chief economist and global strategist at Europac, tweeted on Wednesday. As lawmakers compromise, Democrats can get their way with more spending and Republicans can clamor for tax cuts and succeed in implementing them.

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Schiff, a prominent gold bull and basher of cryptocurrencies, said this would increase budgetary deficits, and for financing the deficit, the Fed will create inflation.

#Republicans finally secured control of the #House. While many are worried about gridlock, the real risk is a bipartisan compromise, where #Democrats get more spending and Republicans get tax cuts. That means larger budget deficits that the #Fed will create #inflation to pay for.

— Peter Schiff (@PeterSchiff) November 17, 2022

Why It’s Important: U.S. fiscal deficit, despite declining 47% year-over-year, still remained bloated at $165.06 billion as of Oct. 2022, according to statistics from the U.S. Treasury Department.

To finance the deficit, the Fed was buying treasury securities, aka quantitative easing, given that its primary dealer banks lacked the balance sheet capacity to buy and resell the debt to others.

This has increased the Fed’s balance sheet assets and correspondingly the excess reserve liabilities the banks hold with the central bank.

An undesirable consequence of the whole thing is the increase in inflation as with QE, money supply increases and credit terms loosen. As inflation became red hot, the Fed stopped its QE in March 2022 and began quantitative tightening in June.

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