Cathie Wood, Founder, CEO and CEO of ARK Invest, speaks at the Milken Institute Global Conference 2022 in Beverly Hills, California, May 2, 2022.
David Swanson | Reuters
The Federal Reserve may be making a mistake in its tough stance against inflation, Ark Investment Management’s Cathie Wood said Monday in an open letter to the central bank.
Instead of looking at employment and price indicators from previous months, Wood said the Fed should draw lessons from commodity prices that show the biggest economic risk going forward is deflation, not inflation. .
“The Fed seems to be focusing on two variables that, in our view, are lagging indicators –– falling inflation and employment –– most of which have been sending conflicting signals and should be question the Fed’s unanimous call for higher interest rates,” Wood said in the letter posted on the company’s website.
Specifically, the consumer price index and personal spending both show high inflation. Title CPI up 0.1% in August and an increase of 8.3% year-on-year, while the title PCE increased by 0.3% and 6.2%, respectively.. Both indexes were even higher minus food and energy, which saw big price declines over the summer.
In terms of employment, payroll growth has slowed but remains strong, with total work achieved is 263,000 in September when the unemployment rate dropped to 3.5%.
But Wood, which manages about $14.4 billion in client funds through a group of active ETFs, said falling prices for commodities like timber, copper and housing are telling a story. other.
Worried about ‘deflation bankruptcy’
The Fed has approved three consecutive rate hikes to 0.75 percentage points, mostly by unanimous vote, and is expected to be OK a fourth time when it meets again on November 1-2.
“Agreed? Really?” Wood wrote. Is it possible that the unprecedented 13 rate hikes over the past six months –– likely 16 times on Nov. 2 –– have shocked not only the US but the world and increased downside risks broadcast?”
Inflation is bad for the economy because it increases the cost of living and reduces consumer spending; Deflation is an inverse risk that reflects falling demand and is associated with an economic downturn.
To be sure, the Fed is hardly alone in raising rates.
Nearly 40 central banks around the world approved September’s hikes, and markets have largely expected all of the Fed’s moves.
However, Criticisms have appeared recently that the Fed may have gone too far and risk dragging the economy into an unwarranted recession.
“There is no question that food and energy prices are important, but we do not believe the Fed should struggle and exacerbate the global pain associated with supply shocks to agriculture and commodities,” Wood writes. energy transformation due to Russia’s invasion of Ukraine”.
The Fed is expected to watch the November rally with another 0.5 percentage point increase in December, then another 0.25 percentage point increase in early 2023.
According to Morgan Stanley, one sector of the market known as overnight index swaps is pricing in two rate cuts by the end of 2023.
