Elon Musk, CEO of Spacex and Tesla, tweeted Friday evening: “A major Fed rate increase risks deflation.” His tweet attracted much attention. It has been liked more than 80K times, and almost 7K times retweeted.
Many comments were received, with some agreeing to Musk’s CEO and others insisting that he was wrong about America’s economy. Raoul Pal, CEO of Real Vision and crypto investor, agreed with Musk. He tweeted: ‘Yup. It’s all pretty much a cake.
Sven Henrich, Northmantrader’s founder and market strategist, stressed the danger of the Federal Reserve being ‘obtuse towards consequences’. He explained that the Federal Reserve was “too slow to respond in the first instance” and is now “slamming on the brakes,” emphasizing that the Fed’s reliance on backward-looking data risks breaking things fast.
Peter Schiff, a bitcoin skeptic and gold bug, offered a different perspective to Musk.
It could lead to hyperinflation. It risks hyperinflation. The Fed will respond by imposing massive QE. This will tank the dollar and send consumer prices skyrocketing.
Political figures also joined the conversation. Nancy Mace, a congresswoman from South Carolina, stated that if [U.S. President Joe] Biden had not spent trillions of dollars on things we don’t have we wouldn’t be having the conversation …’
In a speech in Jackson Hole, Wyoming, Jerome Powell, Chairman of the Federal Reserve, highlighted the central bank’s hawkish attitude. He stated that the Fed’s fight to combat inflation will “cause some pain.” Many are worried about the Federal Reserve raising interest rate. Senator Elizabeth Warren (D.MA) stated that she is’very concerned’ that the central bank’s actions will cause the U.S. to enter recession.
Musk’s tweet came after an analysis from Ark Invest CEO Cathie White, who warned of deflation on Wednesday. She explained that the Fed bases monetary policy decisions upon lagging indicators, such as employment and core inflation.
Leading inflation indicators such as gold and copper warn of the danger of deflation. Even the oil price is down more than 35% since its peak, which erases most of the gains this year.
The gold price, which peaked at $2,075 in August 2020, is one of the most reliable indicators of inflation. It has fallen about 15% since then. Lumber prices have fallen more than 60%, copper has dropped -30%, iron ore 60%, DRAM has -46% and crude oil has dropped -35%,” Wood explained.
Further downstream, retailers appear to be drowning in inventory which they may be forced to sell aggressively to clear shelves for holiday merchandise. According to the executive, the surprise could be deflation in both the CPI and PCE by year-end. “Inflation is becoming deflation in the pipeline,” said the executive.
Musk stated in August that inflation had peaked and would drop quickly. Musk also predicted that there would be a recession lasting approximately 18 months.