Tesla CEO Elon Musk has warned that a major rate hike by the Federal Reserve risks causing deflation in the US economy. Musk’s warning follows an analysis by Cathie Wood, CEO of Ark Invest, who warned that “leading inflation indicators like gold and copper signal the risk of deflation.“
Elon Musk, Fed rate hikes and deflation
Tesla and Spacex CEO Elon Musk tweeted Friday night that “A major Fed rate hike risks deflation“. His tweet has attracted a lot of attention. As of this writing, it has been liked 80,000 times and retweeted nearly 7,000 times.
A major Fed rate hike risks deflation
– Elon Musk (@elonmusk) September 9, 2022
Comments poured in, with some agreeing with the Tesla CEO while others insisted he was wrong about the U.S. economy. Raoul Pal, CEO of Real Vision and crypto-currency investor, agreed with Musk, tweeting, “Yep. It’s pretty much baked into the cake.“
Northmantrader founder and senior market strategist Sven Henrich pointed out that the danger is that the Federal Reserve is “obtuse to consequences.“He specified that the central bank was “too slow to react in the first place” and that she “now presses on the brakes“, pointing out that the Fed is “too dependent on back data and risks breaking everything quickly.“
Peter Schiff offered a different perspective, responding to Musk:
It risks hyperinflation. Rising debt service costs, a severe recession, exploding federal budget deficits, and collapsing asset prices will produce a financial crisis worse than 2008. The Fed will respond with massive quantitative easing, causing the dollar to fall and consumer prices to soar.
Politicians also joined the conversation. U.S. Congresswoman Nancy Mace said, “If Joe Biden and Nancy Pelosi hadn’t spent trillions of dollars that we don’t have, we wouldn’t be having this conversation…“
Federal Reserve Chairman Jerome Powell recently underscored the central bank’s hawkish stance during his speech in Jackson Hole. He noted that the Fed’s fight against inflation “will result in some pain“. Many people are concerned about the Federal Reserve raising interest rates, including U.S. Senator Elizabeth Warren, who said she was “very concerned“that the central bank’s action would tip the U.S. economy into recession.
The Fed is basing monetary policy decisions on lagging indicators: employment and core inflation. Leading inflation indicators like gold and copper are flagging the risk of deflation. Even the oil price has dropped more than 35% from its peak, erasing most of the gain this year. https://t.co/e45KJWrjOZ
– Cathie Wood (@CathieDWood) September 7, 2022
Musk’s tweet follows a analysis by Cathie Wood, CEO of Ark Invest, who warned of deflation on Wednesday. “The Fed is basing its monetary policy decisions on lagging indicators: employment and core inflation,” she detailed, noting:
Leading indicators of inflation like gold and copper signal the risk of deflation. Even the price of oil has fallen more than 35% from its peak, erasing most of the gains made this year.
“One of the best indicators of inflation, the price of gold peaked over two years ago in August 2020 at $2,075 and has fallen about 15%. Wood prices have fallen by over 60%, copper by -30%, iron ore by -60%, DRAMs by -46%, and crude oil by -35%“, explained Cathie Wood.
“Further downstream, retailers appear to be swimming in inventories that they may be forced to aggressively reduce in order to clear shelves for goods. The surprise could be deflation in the CPI and PCE deflator by year-end“, the executive added. “In the pipeline, inflation turns into deflation“.
Elon Musk said in August that inflation has peaked and “will fall rapidly.” He also predicted that we will probably have a recession of about 18 months.