CEO Tesla and Spacex, Elon Musk, tweeted Friday night that “a major rate hike by the US Federal Reserve (Fed) has the potential to cause deflation” to the US economy. His tweet attracted a lot of attention. At the time of writing, the tweet has received 80.2k likes and has been retweeted nearly 6k times.
A major Fed rate hike risks deflationSeptember 9, 2022
"Right. Things are going in the wrong direction.”
Northmantrader founder and leading market strategist, Sven Henrich emphasized that it is dangerous that the Fed is "trying to work out the consequences". He further explained that the central bank "was too slow to react from the beginning" and "now has to do its best to contain it", noting that the Fed's "overdependence on outdated data risks break things fast.”
Skeptics about bitcoin, Peter Schiff offered a different perspective, replying to Musk:
“It has a risk of hyperinflation. Higher debt service costs, a severe recession, a bursting Federal budget deficit, and falling asset prices will create a financial crisis worse than 2008. The Fed will respond with QE large, depreciating the dollar and causing consumer prices to skyrocket.”
Politicians also joined the discussion. Representative Nancy Mace (R-SC) objected:
"If US President Joe Biden and Speaker of the House Nancy Pelosi hadn't spent trillions of dollars, we wouldn't have had this conversation..."
Fed Chairman Jerome Powell recently highlighted the central bank's hawkish stance during his speech in Jackson Hole, Wyoming. He noted that the Fed's fight against inflation will "bring some loss." Many are concerned about the Fed raising interest rates, including Senator Elizabeth Warren (D-MA), who said she is "very worried" that the central bank's action will push the US economy into a recession. .
Musk's tweet follows an analysis by Ark Invest CEO Cathie Wood, who warned of deflation on Wednesday.
“The Fed is making monetary decisions based on lagging indicators: employment and core inflation. Leading inflation indicators such as Gold and Copper are heralding the risk of deflation. Even so, oil prices have fallen more than 35% from their peak, erasing most of this year's gains.”
“One of the best gauges of inflation, Gold price peaked more than two years ago in August 2020 at $2,075 and has fallen about 15%. The price of sawn timber has fallen by more than 60%, Copper -30%, Iron Ore -60%, DRAM -46% and Crude Oil -35%.
“More broadly, retailers seem to be drowning in inventory that could force them to slash prices to clear inventory during the holiday season. The surprise could be the CPI and PCE deflation at the end of the year. Inflation is turning into deflation.”
In August, Musk said inflation had peaked and "will fall rapidly". He also predicts that the US will probably experience a recession lasting about 18 months.