Asset management firm, ARK Invest, has directly addressed the Federal Reserve over its decision to increase funds interest rates, with the concern that such serious policy errors could lead to deflation.
ARK Founder Questions Interest Hikes
Founder Cathie Wood penned an open letter addressing the Fed, which has been published on the ARK Invest website. The letter provides some data and appeals to the Fed to consider facts before taking its next decision on November 2. Wood also claims that the Federal Reserve is making a mistake in its extremely hard-line stance against inflation and explains that the commodity prices indicate that deflation is a bigger economic risk than inflation.
She writes,
“The Fed seems focused on two variables that, in our view, are lagging indicators –– downstream inflation and employment ––both of which have been sending conflicting signals and should be calling into question the Fed’s unanimous call for higher interest rates.”
She explains that the upstream price deflation is likely to turn into downstream deflation, especially since the Fed is making decisions based on both variables like employment and headline inflation.
High Rates Could Lead To Deflation: Wood
The open letter also points out that the leading indicators of deflation are commodity prices, which have mostly (except for food and energy) peaked and are dropping down further every year. According to Wood, even though food and energy are very crucial commodities, the Fed’s attention on the matter could make things worse. The global pain associated with the supply shock to agriculture and energy commodities due to the Russia-Ukraine war could be exacerbated by the Fed’s involvement.
She has called out the Fed’s unanimous call for higher interest rates, writing,
“Initial claims for unemployment insurance declined and nonfarm payroll employment increased 263,000, but job openings as measured by JOLTS fell 10% or 1.1 million, manufacturing employment as measured by the ISM Purchasing Managers Index contracted, and Challenger involuntary job separations soared 67.6% on a year-over-year basis.”
Fed Keeps Pushing For Rate Hikes
The Fed has so far pushed through three consecutive hikes of interest rates by 0.75 percentage points, claiming a unanimous vote. It is expected to vote for a fourth time again during its meeting on November 2, 2022. Wood believes that the 13-fold increase in interest rates over the last six months could very well become 16-fold after the meeting and raises the risks of a deflationary bust. Both extreme inflation and deflation are harmful to the economy, as the former raises the cost of living and suppresses consumer spending, while the latter indicates dropping demand and can bring steep economic downturns.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.
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