Tesla CEO Elon Musk has warned that a major interest rate increase 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 such as gold and copper are flagging the risk of deflation.”
Elon Musk, Fed rate hikes and deflation
Tesla and Spacex CEO Elon Musk tweeted Friday night that “A big Fed rate hike risks deflation.” His tweet has attracted 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 boss, while others insisted he was wrong about the US economy. Real Vision CEO and crypto investor Raoul Pal agreed with Musk, tweeting: “Yeah. Pretty much baked in the cake.”
Northmantrader founder and chief market strategist Sven Henrich emphasized that the danger is that the Federal Reserve is “comfortable to consequences”. He elaborated that the central bank was “too slow to react in the first place” and is “now putting its foot on the brake”, stressing that the Fed is “too dependent on backward-looking data that risks breaking things quickly.”
Gold bug and bitcoin skeptic Peter Schiff offered a different view, responding to Musk:
It risks hyperinflation. Higher debt servicing 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, depressing the dollar and sending consumer prices soaring.
Politicians also looked into the conversation. Congresswoman Nancy Mace (R-SC) opined, “If [U.S. President Joe] Biden and [House Speaker Nancy] Had Pelosi not 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 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 Senator Elizabeth Warren (D-MA), who stated that she is “very concerned” that the central bank’s action will tip the US economy into recession.
Musk’s tweet followed one analysis by Ark Invest CEO Cathie Wood who warned of deflation on Wednesday. “The Fed bases monetary policy decisions on lagging indicators: employment and core inflation,” she detailed, elaborating:
Leading inflation indicators such as gold and copper flag the risk of deflation. Even oil prices have fallen more than 35% from their peak, erasing most of their gains this year.
“One of the best gauges of inflation, gold prices peaked more than two years ago in August 2020 at $2075 and have fallen around 15%. Lumber prices have fallen 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 that they may be forced to discount aggressively to clear shelves of holiday goods. The surprise could be deflation in the CPI and PCE deflator by the end of the year,” the manager added. “In the pipeline, inflation is turning into deflation.”
Musk said in August that inflation has peaked and “is going to come down quickly.” He also predicted that we are likely to 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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