Tesla CEO Elon Musk has warned that a major rate hike by the Federal Reserve could cause deflation in the US economy. Musk’s warning follows an analysis by Ark Invest CEO Cathie Wood, who warned that “leading inflation indicators like gold and copper signal the risk of deflation.”
Elon Musk, Fed rate hikes and deflation
Tesla and Spacex CEO Elon Musk tweeted late Friday that “a major Fed rate hike risks deflation.” His tweet got a lot of attention. As of this writing, it has been liked 80,000 times and retweeted nearly 7,000 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: “Yeah. Pretty much baked in the cake.
Northmantrader founder and senior market strategist Sven Henrich pointed out that the danger is that the Federal Reserve is “obtuse about consequences”. He explained that the central bank was “too slow to react in the first place” and “is now stepping on the brakes”, pointing out that the Fed is “too dependent on historical data, risking breaking things quickly. “.
Peter Schiff, skeptical of gold bugs and bitcoins, offered a different view, responding to Musk:
It risks hyperinflation. Rising debt service costs, a severe recession, exploding federal budget deficits and collapsing asset prices will produce a financial crisis worse than in 2008. The Fed will respond with massive QE, driving down the dollar and causing consumer prices to skyrocket.
Politicians also joined in the conversation. Congresswoman Nancy Mace (R-SC) said, “If [U.S. President Joe] Biden and [House Speaker Nancy] Hadn’t Pelosi spent trillions of dollars that we don’t have, we wouldn’t be having this conversation…”
Federal Reserve Chairman Jerome Powell recently underscored 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 raising interest rates, including Sen. Elizabeth Warren (D-MA), who said she was “very concerned” that central bank action tip the US economy into recession.
Musk’s tweet followed a analysis by Ark Invest CEO Cathie Wood, who warned against deflation on Wednesday. “The Fed bases its monetary policy decisions on lagging indicators: employment and underlying inflation”, she detailed, specifying:
Major inflation indicators like gold and copper signal the risk of deflation. Even the price of oil has fallen more than 35% from its peak, erasing most of the gain this year.
“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 fell over 60%, copper -30%, iron ore -60%, DRAM -46% and crude oil -35%,” Wood explained.
“Further downstream, retailers appear to be swimming in inventory that they may be forced to aggressively reduce to clear shelves of holiday merchandise. The surprise could be CPI and PCE deflator deflation from here. the end of the year,” the executive added. “In the pipeline, inflation turns into deflation.”
Musk said in August that inflation had peaked and “will fall rapidly.” He also predicted that we will probably have a recession of about 18 months.
Do you agree with Elon Musk that a big Fed rate hike could lead to deflation? Let us know in the comments section below.
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