Tesla and SpaceX CEO Elon Musk has issued a warning for the US economy. Musk warns that another major hike by the Federal Reserve will lead to deflation. Musk’s warning comes amid expectations that the Fed will make another massive interest rate hike at the September FOMC meeting.
Elon Musk isn’t the leading figure to present a doom and gloom scenario for the U.S. economy. Noted investor and founder of Scion Asset Management, Michael Burry, has predicted a 2008-style economic crisis in the United States.
For his part, economist Peter Schiff warns against a hyperinflation. He believes that the Fed will quickly move to quantitative easing, which will cause runaway inflation in the economy.
It risks #hyperinflation. Higher debt service costs, a severe #recession, exploding Federal budget deficits, and collapsing asset prices will produce a worse financial crisis than 2008. The #Fed will respond with massive QE, tanking the dollar and sending consumer prices soaring.
– Peter Schiff (@PeterSchiff) September 10, 2022
Analysis of Elon Musk’s deflation warning
Elon Musk believes that a further increase in interest rates by the Fed will lead to deflation. Deflation is the decrease in the price of goods and services. Deflation can be caused by a multitude of factors such as increased productivity, decreased demand, or the contraction of a country’s money supply.
According to Elon Musk, the current risk of deflation comes from the contraction of the money supply as the Fed has engaged in qualitative tightening to combat runaway inflation. Fed Chairman Jerome Powell has already promised to hurt households and businesses. He also revealed that the Fed will try to increase the strength of the dollar to help consumers fight inflation.
Deflation may be good news for consumers, who now have more purchasing power with the same amount of money. However, if it continues over a long period of time, it can lead to a shrinking economy and a deep crisis in the economy.
The Fed’s next interest rate hike
The next Fed interest rate hike will be decided on September 21, 2022. Currently, the CME fed Watch tool shows a 91% probability of a 75 basis point increase. Goldman Sachs has also changed its prediction from a 50 basis point hike to a 75 basis point hike.
The September 13 CPI data will also have a major impact on the decision.