Elon Musk is worried about the economy.
For several months, the world’s richest man has continued to sound the alarm, warning that the economy could face a deep recession if central bank monetary policy stays on track.
As the Federal Reserve holds its final currency meeting of the year in the coming days, the serial entrepreneur has just issued a fresh forecast. And like his previous predictions, this one is very alarming.
The Federal Reserve has hiked interest rates sharply in recent months, cutting the benchmark interest rate from almost zero to a range of 3.75% to 4% during the pandemic to combat inflation, which has hit its highest level in 40 years. But many economists say this aggressive monetary policy will plunge the economy into recession.
“The recession will be greatly intensified”
The central bank holds a two-day meeting on December 13-14. Policymakers are expected to hike rates by 50 basis points after four straight hikes of 75 basis points.
In addition, the Fed will publish its first quarterly forecast since September. This will provide clues as to where the central bank is steering the US economy over the next few years.
CME Group’s FedWatch continues to suggest that next week’s announcement will be a 50 basis point rate hike, taking the fed funds benchmark to between 4.25% and 4.5%, with a target rate of between 5% and 5% .25% by spring, which is already largely reflected in futures trading.
Musk believes it would be a big mistake for the Fed to announce a rate hike as expected. The decision would plunge the economy into an even deeper recession than already anticipated, he has just warned.
“If the Fed hikes rates again next week, the recession will be significantly deepened,” the billionaire said in a message published on Twitter on Dec. 9.
The CEO of electric vehicle manufacturer Tesla (TSLA) – Get a free reportagrees with star investor Cathie Wood, who continues to claim that continued rate hikes will lead to deflation, a risk Musk hinted at last September.
“The bond market appears to be signaling that the Fed is making a serious mistake,” Wood wrote on Dec. 7. “At -80 basis points (as measured by 10-year versus 2-year Treasury yields), the yield curve is more inverted now than it has been since the early 1980s, when double-digit inflation was entrenched.”
She added: “Typically, an inverted yield curve indicates a recession and/or lower than expected inflation. In our view, deflation is a much bigger risk than inflation. Commodity prices and massive retail discounts support this view.”
To which Musk replied on Dec. 9, “Absolutely.”
Deflation vs Inflation
But economist Peter Schiff contradicts the two influencers.
“Actually, the yield curve reflects investor expectations that the #Fed will manage to push #inflation down to 2%,” Schiff commented on Musk’s post. “Investors are wrong. The only thing the Fed will do is make the #recession worse, which will crush the dollar and push up consumer prices.”
The spread between 3-month bills and 10-year bonds is around 80 basis points, the steepest since 2001 and a worrying harbinger of a recession.
According to a study by the San Francisco Federal Reserve, all nine recessions the US economy has suffered since 1955 have been preceded by a persistently inverted yield curve, making it an extremely accurate barometer of sentiment in financial markets.
Last September, the entrepreneur warned that a jumbo rate hike would lead to long-term deflation.
“A big Fed rate hike risks deflation,” the SpaceX CEO said.
The consequences of deflation can be devastating for the economy, as falling prices encourage households to postpone purchasing decisions while waiting for further price declines.
This, in turn, can lead to a decrease in overall consumption and an increase in inventories at companies that can no longer sell their products. In response, they reduce production and investment.
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