Tesla CEO Elon Musk has warned that a major rate hike by the Federal Reserve risks deflation in the U.S. economy. Musk’s warning followed an analysis by Ark Invest CEO Cathie Wood, who cautioned that “Leading inflation indicators like gold and copper are flagging the risk of deflation.”
Elon Musk, Fed Rate Hikes, and Deflation
Tesla and Spacex CEO Elon Musk tweeted Friday evening that “A major Fed rate hike risks deflation.” His tweet has attracted much attention. At the time of writing, it has been liked 80K times and retweeted almost 7K times.
Comments flooded in with some agreeing with the Tesla CEO while others insisted he was wrong about the U.S. economy. Real Vision CEO and crypto investor Raoul Pal agreed with Musk, tweeting: “Yup. Pretty much baked in the cake.”
Northmantrader founder and lead market strategist Sven Henrich stressed that the danger is the Federal Reserve being “obtuse to consequences.” He elaborated that the central bank was “Too slow to react in the first place” and is “now slamming the foot on the brakes,” emphasizing that the Fed is “too reliant on backward-looking data risking breaking things quickly.”
Gold bug and bitcoin skeptic Peter Schiff offered a different view, replying to Musk:
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.
Politicians also chimed in on the conversation. Congresswoman Nancy Mace (R-SC) opined: “If [U.S. President Joe] Biden and [House Speaker Nancy] Pelosi hadn’t spent trillions of dollars we don’t have, we wouldn’t be having this conversation…”
Federal Reserve Chairman Jerome Powell recently emphasized the central bank’s hawkish stance in his speech at Jackson Hole, Wyoming. He noted that the Fed’s fight against inflation will “bring some pain.” Many people are concerned about the Federal Reserve raising interest rates, including Senator Elizabeth Warren (D-MA), who stated that she is “very worried” that the central bank’s action will tip the U.S. economy into recession.
Musk’s tweet followed an analysis by Ark Invest CEO Cathie Wood who warned about deflation on Wednesday. “The Fed is basing monetary policy decisions on lagging indicators: employment and core inflation,” she detailed, elaborating:
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.
“One of the best inflation gauges, the gold price peaked more than two years ago in August 2020 at $2,075 and has dropped about 15%. Lumber prices have dropped more than 60%, copper -30%, iron ore -60%, DRAM -46%, and crude oil -35%,” Wood explained.
“Further downstream, retailers seem to be swimming in inventories which they could be forced to discount aggressively to clear the shelves for holiday merchandise. The surprise could be deflation in the CPI and PCE deflator by year-end,” the executive added. “In the pipeline, inflation is turning into deflation.”
Musk said in August that inflation has peaked and “is going to drop rapidly.” He also predicted that we will likely have a recession lasting about 18 months.
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A student of Austrian Economics, Kevin found Bitcoin in 2011 and has been an evangelist ever since. His interests lie in Bitcoin security, open-source systems, network effects and the intersection between economics and cryptography.
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