Cathie Wood says Fed is wrong as calls for 100bps rise grow, Elon Musk confirms warning

(Kitco news) The Federal Reserve should be more concerned about long-term deflationary trends, ARK Investment Management LLC CEO Cathie Wood said, adding that the U.S. central bank is making a mistake with its aggressive rate hikes.

Wood pointed to lower commodity prices, gold prices and falling freight charges as signs that price pressures are easing.

She explained that gold, which is known for its anti-inflation properties, is trading well below its peak of over $2,000 an ounce, while commodities such as copper, lumber, iron ore and oil have all fallen dramatically from previous highs.

She also noted that the US economy is already likely in recession, which will eventually affect prices and reduce inflation.

The Fed’s aggressive hiking cycle “will turn out to be a mistake,” Wood said in a webcast for investors on Tuesday. “We are now being followed by some loud voices on this risk of deflation.”

August price pressures from the US surprised the market on Tuesday, as Wall Street experienced its worst day on record since June 2020 in response to an annual CPI number of 8.3% versus 8.1% expected.

After the CPI data, the markets started to raise rates more aggressively than the Fed at the upcoming meeting in September. According to the CME FedWatch Tool, there is now a 26% chance of a 100 bps rate hike and a 74% chance of another 75 bps increase.

Wood’s Ark Innovation ETF has been caught in a market selloff this year, down 54.4% year-to-date. But despite the price performance, Wood’s thinking is getting a nod from other big names, including Tesla and SpaceX CEO Elon Musk and DoubleLine CEO Jeffrey Gundlach.

In response to the question “what should the Fed do?” On Wednesday, Musk tweeted that the US central bank should “fall 0.25 percent.” He added that “a big Fed rate hike risks deflation.”

Gundlach also warned of a potential monetary policy misstep as the Fed runs away with rate hikes. While DoubleLine’s CEO is predicting a 75 basis point increase at next week’s September meeting, he would prefer a much smaller increase of just 25 basis points. Using too many rate hikes in a row without a break could lead to unintended consequences, Gundlach warned.

“Despite the fact that today’s narrative is exactly the opposite, the risk of deflation is much higher today than it has been in the last two years,” Gundlach told CNBC on Tuesday. “I’m not talking about next month. I’m talking about some time later next year, probably 2023.”

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