Tesla CEO Elon Musk has warned that a major rate hike by the US Federal Reserve risks deflating the US economy. Musk’s warning followed an analysis by Ark Invest CEO Cathy Wood, who warned that “leading inflation indicators such as gold and copper point to 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 gotten a lot of attention. At the time of writing, it has been liked 80K times and retweeted almost 7K times.
Comments poured in with some agreeing with the Tesla CEO, while others insisted he was wrong about the US economy. Real Vision CEO and crypto investor Raoul Pal agreed with Musk, tweeting: “Yes. Pretty much baked into the cake.”
Northmantrader founder and chief market strategist Sven Henrich stressed that the risk is that the Federal Reserve is “blunt in consequence.” He elaborated that the central bank was “too slow to react in the first place” and is “now putting its foot on the brakes”, stressing that the Fed is “too dependent on backward-looking data, risking breaking things quickly”.
Gold and bitcoin skeptic Peter Schiff offered a different take, responding to Musk:
It is at risk of hyperinflation. Higher debt servicing costs, a severe recession, exploding federal budget deficits and collapsing asset prices will cause the worst financial crisis since 2008. The Fed will respond with massive QE, depressing the dollar and driving up consumer prices on high level.
Politicians also took part in the debate. Rep. Nancy Mace (R-SC) opined: “If [U.S. President Joe] Biden and [House Speaker Nancy] Had Pelosi not spent trillions of dollars that we don’t have, we wouldn’t be having this conversation…”
Federal Reserve Chairman Jerome Powell recently highlighted the central bank’s aggressive stance in a speech in Jackson Hole, Wyoming. He noted that the Fed’s fight against inflation will “bring some pain.” Many people are worried about the Federal Reserve raising interest rates, including Sen. Elizabeth Warren (D-MA), who said she is “very concerned” that the central bank’s action will send the US economy into recession.
Musk’s tweet followed a analysis from Ark Invest CEO Cathie Wood, who warned of deflation on Wednesday. “The Fed bases monetary policy decisions on lagging indicators: employment and core inflation,” he said, clarifying:
Leading inflation indicators such as gold and copper point to the risk of deflation. Even the price of oil has fallen more than 35% since its peak, erasing most of this year’s gain.
“One of the best gauges of inflation, the price of gold peaked more than two years ago in August 2020 at $2,075 and has fallen about 15%. Lumber prices fell more than 60%, copper -30%, iron ore -60%, DRAM -46% and crude oil -35%,” explained Wood.
“Further downstream, retailers appear to be swimming in inventory which could force them to aggressively discount to clear shelves for holiday merchandise. The surprise could be the deflation of CPI and PCE deflator by the end of the year,” the executive added. “In the process, inflation turns into deflation.”
Musk said in August that inflation had peaked and “will come down quickly.” He also predicted that we will likely have a recession lasting about 18 months.
Do you agree with Elon Musk that a major Fed rate hike could lead to deflation? Let us know in the comments section below.
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