The Fed committed ‘serious mistake’ and it could push economy into ‘Great Depression’ – Ark’s Cathie Wood

(Kitco News) The Federal Reserve is ignoring signs of an economic slowdown. And its massive rise could make the economy look like the Great Depression, said Ark Invest CEO Cathie Wood.

Deflationary signs are already strong, and the establishment looks like a century ago.

“Twenty years ago, the world was at war – WWI – and suffering from an epidemic – the Spanish Flu. Although all of this had a significant impact on the world economy, today’s combination is strong enough to cause a much lower than expected inflation rate. and new growth ,” Wood said in a Twitter thread. “The preparation is very similar [to today]!”

The 1920s was a time when “a lot of modern technology evolved at the same time,” including the telephone, electricity, and the internal combustion engine, Wood said.

Inflation in the 1920s was over 20% as WWI and the Spanish flu caused a supply crisis. In response, the Fund raised rates sharply from 4.6% to 7% in just one year. In 1921, inflation dropped to 15%.

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Based on this model, Wood does not rule out annual inflation being negative in 2023 as the Fed continues to pursue a hawkish monetary policy, which Wood described as a major flaw.

“We would not be surprised to see inflation in the economy in 2023,” he wrote over the weekend. “The Fed raised the interest rate more than twice from 4.6% to 7% in 1919-1920. In the face of very low inflation this time, the Fed has increased the interest rate by 16%, a big mistake in our opinion.”

However, there is a possibility of another 20-year rate hike, and this will depend on what the Fed decides to do next year.

“If inflation falls below the Fed’s target of 2% and economic activity is disappointing, then interest rates may surprise below expectations next year, triggering a turn of the century for the Twenties,” Wood explained.

When inflation dropped to 15% in June 1921, the rate dropped from 7% to 4% within 14 months. This “trip”[ed] change of the Twenties,” said Wood.

Wood warned that with the Fed now focused on fighting inflation, the Fed pivot in 2023 may not happen, which could lead to something similar to the Great Depression.

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“If the Fed doesn’t rotate, the situation will be the same as it was in 1929. The Fed raised rates in 1929 to suppress economic sentiment and then, in 1930, Congress passed Smoot-Hawley, imposing 50%+ tariffs on over 20,000 products and pushing the world economy into the Great Depression. economically,” he said.

Meanwhile, the US central bank has looked at past demonstrations, where Fed officials have not debated their monetary policy while all members have voted unanimously.

“The Fed is ignoring deflationary signs, and the Chips Act may hurt the economy more than we think. Like what Smoot-Harley did, economists did not pay much attention to the impact of the Chips Act,” he added. “The University of Michigan’s Consumer Sentiment Survey has fallen sharply, below in 2008-09 and 1979-82, the creation of a financial trap similar to the one in the Great Depression when the great stimulus of money failed.”

The CHIPS and Science Act became law on August 9, 2022. It aims to invest $280 billion to strengthen US competitiveness, technology, and national security. Targeted industries include domestic semiconductor manufacturing, quantum computing, AI, clean energy, and nanotechnology.

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Wood is not the only voice in the deflationary camp, as DoubleLine CEO Jeffrey Gundlach recently said that the risk of deflation is higher today than it has been in the past two years.

Over the weekend, Goldman Sachs revised its inflation outlook, saying it expects a “significant decline” in the US inflationary pressures in 2023. The bank cited a peak in the housing market, slower wage growth, and lower income issues. money.

In its revised estimate, the core consumer spending index (PCE), which is the Fed’s target for inflation, is seen slowing to 2.9% by December 2023. Currently, core PCE sits at 5.1%.

Disclaimer: The views expressed in this article are those of the author and may not necessarily reflect a The opinion of the company Kitco Metals Inc. The author has made every effort to ensure that the information provided is accurate; however, even Kitco Metals Inc. nor can the author guarantee such accuracy. This article is for informational purposes only. It is not a solicitation to sell goods, securities or other financial instruments. Kitco Metals Inc. and the author of this article accepts no responsibility or liability for the use of this publication.


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