Tesla CEO Elon Musk warned that a steep 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 “major inflation indicators such as gold and copper are signaling the risk of deflation.”
Elon Musk, Fed rate hikes and deflation
On Friday night, Tesla and Spacex CEO Elon Musk tweeted that “Major Fed rate hike risks deflation.” His tweet attracted a lot of attention. At the time of writing, it has been enjoyed 80,000 times and retweeted nearly 7,000 times.
The comments came with some agreeing with Tesla’s CEO, while others insisted he was wrong about the US economy. Real Vision CEO and cryptocurrency investor Raoul Pal agrees with Musk, tweeting, “Yes. Basically baked in pie.
Northmantrader founder and principal market strategist Sven Henrich pointed out that the danger is that the Federal Reserve is “obtuse to the consequences”. He explained that the central bank was “too slow to react in the first place” and “is now hitting the brakes”, noting that the Fed is “too dependent on backsights which risk breaking things quickly.”
Peter Schiff, a gold bug and bitcoin skeptic, offered a different view, replying to Musk:
Risk hyperinflation. Higher debt service costs, a severe recession, a bursting federal budget deficit and plummeting asset prices will produce a worse financial crisis than in 2008. The Fed will respond with massive QE, cashing in on the dollar and making soaring consumer prices.
Politicians also intervened in the conversation. Congresswoman Nancy Mace (RSC) said: “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 have this conversation … “
Federal Reserve Chairman Jerome Powell recently highlighted the central bank’s hawkish stance in his speech in Jackson Hole, Wyoming. He noted that the Fed’s fight against inflation “will bring pain.” Many people are concerned about the Federal Reserve’s rising interest rates, including Senator Elizabeth Warren (D-MA), who said she was “very concerned” that central bank action could precipitate the US economy in recession.
Musk’s tweet followed a analyses by Cathie Wood, CEO of Ark Invest, 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 indicators such as gold and copper are signaling the risk of deflation. The price of oil also fell more than 35% from its peak, wiping out most of this year’s gain.
“One of the best indicators of inflation, the price of gold peaked more than two years ago in August 2020 at $ 2,075 and fell about 15%. Timber prices have fallen by more than 60%,” -30% copper, -60% iron ore, -46% DRAM and -35% crude oil, “explained Wood.
“Further downstream, retailers appear to be swimming in inventory that may be forced to aggressively discount to clear the shelves for holiday merchandise. The surprise could be the deflation of the CPI and PCE deflator by the end of the year, “added the executive.” In the pipeline, inflation is turning into deflation. “
Musk said in August that inflation has peaked and “will fall 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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