Tech entrepreneur Elon Musk chimed in on the inflation debate as Federal Reserve policymakers braced for a two-day meeting where markets expect the central bank to deliver another big rate hike to cool soaring prices.
Musk took to Twitter on Sept. 19 to argue that former Treasury Secretary Larry Summers made a “fundamental error” in viewing the current inflationary spurt as 1970s-like and deeply rooted.
“Yes, the fundamental error is analogy rather than rationale,” Musk wrote in response to a message from Cathie Wood, CEO and CIO of Ark Invest, who argued that Summers “misled the Biden administration with his conviction.” Inflation is stubborn, using the 1970s as a guide.”
Wood added in a follow-up message that the current surge in inflation started with the pandemic and supply chain disruptions and was exacerbated by Russia’s invasion of Ukraine.
“The Fed solves supply chain issues by dampening demand and triggering deflation, I think, and making it a major tipping point,” she argued, prompting Musk to respond with his approval.
Musk’s comments feed into the current debate about whether the Fed is raising too much or too little, and whether more inflation — or deflation — is on the way as the economy cools.
Inflation or deflation?
In a recent interview with Bloomberg’s Wall Street Week, Summers said the Fed was too slow to react to rising inflation and that the central bank must now continue to hike aggressively to contain price pressures.
“History records many, many instances where policy adjustments to inflation have been unduly delayed and have had very significant costs,” Summers said, noting that the most prominent example of such costs was during the long period of high inflation in the 1970s .
Summers added that he sees evidence that inflation has become entrenched. He pointed out that core inflation rose by more than 6 percent in August, as well as strong wage increases for job changers and rising input costs in the housing sector.
The former Treasury Secretary also said he wouldn’t be surprised if the Fed hiked rates above 5 percent to bring down inflation.
But Wood argued that deflation – not more inflation – is fast approaching as more economic data emerges that points to a slowdown.
“Deflation in pipeline, towards PPI, CPI, PCE deflator: from post-COVID price spikes, timber -60 percent, copper -35 percent, oil -35 percent, iron ore -60 percent, DRAM -46 percent, corn -17 percent , Baltic freight rates -79 percent, gold -17 percent and silver -39 percent,” Wood wrote in a previous message on Twitter, responding to Musk’s statement that “a larger rate hike by the Fed risks deflation.” (PPI is the producer price index and PCE is the personal consumption expenditure price index.)
The inflation discussion comes as the Fed’s policy arm, the Federal Open Market Committee, begins its two-day meeting on September 20-21. A rate decision will be announced on Wednesday.
“Some Pain” price to reduce inflation
The Fed is likely to hike its reference rate by 75 basis points for a third straight meeting on Sept. 21, according to Fed Funds futures contracts, which show an 80 percent probability of such a hike and a 20 percent chance of a larger base bid out of 100. point boost.
“We are seeing strong signs that central banks are not ‘blinking’ and willing to tolerate a recession if that is the price they have to pay to bring inflation under control, and that means higher yields around the world in the short term Over.” Andrew Ticehurst, interest rates strategist at Nomura, told Bloomberg.
In futures markets, the benchmark overnight interest rate will rise to 4.30 percent by the end of this year, peak at 4.43 percent in March, about 2 percentage points above current levels, and will not fall below 4 percent again until 2024.
With many analysts believing the Fed is coming too late in the fight against inflation, Fed Chair Jerome Powell recently made remarks underscoring the central bank’s determination to break price pressures, even at the cost of higher unemployment and “something pain” for American households.
“Reducing inflation will likely require a sustained period of below-trend growth. In addition, there is very likely to be some softening of labor market conditions,” Powell said in an Aug. 26 speech.
“These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain,” the central bank governor added.
consequences
Tom Ozimek has a broad background in journalism, deposit insurance, marketing and communications, and adult education. The best writing advice he’s ever heard comes from Roy Peter Clark: “Hit your target” and “leave the best for last”.
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