The world economy is going through an unprecedented time. The living cost is higher than in the last 45 years. The Federal Reserve plans to increase the interest rate in such a devastating situation. However, Ark Investment Management’s Cathie Wood strongly opposed this idea and wrote an open letter to FED raising her concern over the planning.
According to Cathie Wood, FED is making a mistake by only considering the employment and price indexes. It should look into the commodity prices, which indicate an economic risk of deflation, not inflation. FED is considering prices of things like CPI, which rose by 0.1% in August and 8.3% this year. The PCE rose to 0.3% in Aug and 6.2% this year.
Additionally, the unemployment rate fell by 3.5% this year, with more than 263K people getting jobs. However, this is one side of the coin, and the other side is telling a different story. The prices of lumber, copper, and housing commodities are decreasing, and that should be considered because they increase the risk of a deflationary bust.
What is a deflationary bust?
To know the whole story, you must know about the deflationary bust. A deflationary bust is likely to occur during an economic crisis or recession. It is a phenomenon in which people do not spend their money due to high inflation rates. The demand for things becomes lower—the investment and consumption rates also slowdowns.
People and businesses start holding their money because of the further financial crisis. When more money is saved, there will be less investment and less demand for goods. This disrupts the demand and supply chain, which further increases the financial crisis. When prices started decreasing, people’s expectations of future inflation also lowered downs, and they held their money more.
Consumers spend less money because they think the prices will be lower tomorrow, so why spent today? This cycle disturbs the whole economic system from which Cathie Wood is warning The FED.
Cathie Wood wrote in her letter that the world should not be concerned about inflation but should be ready for deflation if the FED went with the same strategy of increasing the interest rate. The FED has increased the interest rate by 0.75 points three consecutive times, and the fourth one is ready. FED also accepts this with a unanimous vote.
Cathie Wood writes that this would not only shock the US but the whole world because our economic system is going to face a deflationary bust. She writes that inflation is bad for the economy, but deflation is worse. According to Cathie Wood, FED is alone responsible for this because of its interest rate-increasing policy.
Forty different central banks around the world followed the FED policy of increasing the interest rate in the month of September. Due to this, the FED is facing constant criticism because of producing a way for an unnecessary economic recession. According to Cathie Wood, the FED should not consider only the food and energy prices that are caused by the Ukraine-Russia war.
Reading Cathie Wood’s letter to FED tells you a different story than the rest of the world. At a point where almost all the banks and governments in the world are fighting inflation, Cathie Wood thinks that deflation would be worse than inflation. In inflation, the money circulates in the market, and businesses grow; however, in deflation, everything is halted.
The FED should take the letter seriously and needs to rethink its policies of increasing the interest rates in the near future, as it plans to increase the interest rate by 0.5% in December and 0.25% in early 2023.