Tesla CEO Elon Musk has warned that a further rate hike by the Federal Reserve risks deflation in the US economy. Musk’s warning followed an analysis by Ark Invest CEO Cathie Wood, who warned that “leading inflation indicators like gold and copper are signaling deflation risk.”
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Elon Musk Tesla, Fed rate hikes and deflation
Tesla and Spacex CEO Elon Musk tweeted late Friday that “a big Fed rate hike risks deflation.” Your tweet got a lot of attention. As of this writing, it has received 80,000 likes and has been retweeted nearly 7,000 times.
Comments were flooded with some agreeing with the Tesla CEO, while others insisting he was wrong about the US economy. Real Vision CEO and cryptocurrency investor Raoul Pal agreed with Musk and he tweeted: “Yes. Practically baked in the cake.
Northmantrader founder and chief market strategist Sven Henrich stressed that the danger is that the Federal Reserve is “up front about the consequences.” He explained that the central bank was “too slow to react in the first place” and “now it’s hitting the brakes,” stressing that the Fed is “too reliant on retroactive data, risking breaking things down quickly.”
Golden bug and bitcoin skeptic Peter Schiff offered a different take, responding to Musk:
You run the risk of hyperinflation. Higher 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 QE, sinking the dollar and raising consumer prices.
Politicians also joined the conversation. Representative Nancy Mace (R-SC) opined: “If [U.S. President Joe] Biden and [House Speaker 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 emphasized the central bank’s aggressive stance in his speech in Jackson Hole, Wyoming. He noted that the Fed’s fight against inflation “will bring some pain.” Many people are concerned about the Federal Reserve’s interest rate hike, including Senator Elizabeth Warren (D-MA), who said she was “very concerned” that the central bank’s action would push the US economy into the recession.
Musk’s tweet followed an analysis by Ark Invest CEO Cathie Wood who warned of deflation on Wednesday. “The Fed is basing monetary policy decisions on lagging indicators: employment and core inflation,” she detailed, elaborating:
Leading inflation gauges such as gold and copper signal deflation risk. Even the price of oil is down more than 35% from its peak, erasing most of this year’s gain.
“One of the best indicators of inflation, the price of gold peaked over two years ago in August 2020 at $2,075 and fell about 15%. Timber prices have fallen more than 60%, copper -30%, iron ore -60%, DRAMs -46% and crude oil -35%,” Wood explained.
“Further downstream, retailers appear to be swimming in inventories that may be forced to aggressively discount to clear shelves of holiday merchandise. The surprise may be the deflation of the CPI and PCE deflator until the end of the year”, added the executive. “On the way, inflation is turning into deflation.”
Musk said in August that inflation had peaked and was “going to come down quickly.” He also predicted that we will probably have a recession that will last about 18 months.
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Do you agree with Elon Musk that a further Fed rate hike could lead to deflation? Let us know in the comments section.
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