Elon Musk is worried about the economy.
The richest man in the world has been warning for several months that the economy is at risk of a deep recession if the monetary policy of the central bank remains on the planned path.
As the Federal Reserve holds its final monetary meeting of the year in the coming days, the serial entrepreneur just made a new prediction. And like his past predictions, this one is deeply concerning.
The Federal Reserve has raised interest rates sharply in recent months, lifting the benchmark interest rate from near zero during the pandemic to a range between 3.75% and 4% to counter inflation, which is the highest in 40 years. But many economists say this aggressive monetary policy will plunge the economy into recession.
“The recession will increase sharply”
The central bank has a two-day meeting on December 13 and 14. Policymakers are expected to raise interest rates by 50 basis points after four consecutive 75 basis point hikes.
In addition, the Fed will release its first quarterly forecasts since September. This will provide clues as to where the central bank sees the US economy headed in the next few years.
CME Group’s FedWatch continues to indicate that next week’s forecast will be a 50 basis point rate hike, taking the benchmark Fed Funds to between 4.25% and 4.5%, with a target rate between 5% and 5 .25% by spring, which is already reflected to a large extent. when trading futures contracts.
Musk believes it would be a big mistake if the Fed announced a rate hike as expected. The decision would plunge the economy into an even worse recession than is already expected, he just warned.
“If the Fed raises interest rates again next week, the recession will deepen,” the billionaire said in a message posted on Twitter on Dec. 9.
CEO of electric vehicle manufacturer Tesla (TSLA) – Get a free reporthe also agrees with celebrity investor Cathie Wood, who continues to argue that further increases in interest rates 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 vs. 2-year Treasury yields), the yield curve is more inverted. now than at any time since the early 80s when double-digit inflation was entrenched.”
She added: “An inverted yield curve usually indicates a recession and/or lower-than-expected inflation. In our view, deflation is a much bigger risk than inflation. Commodity prices and heavy retail discounts support this view.”
To which Musk replied, “Absolutely,” on December 9.
Deflation vs Inflation
But economist Peter Schiff disagrees with two influencers.
“Actually, the yield curve reflects investors’ expectations that the #Fed will be able to lower #inflation to 2%,” Schiff commented on Musk’s announcement. “Investors are wrong. The only thing the Fed will do is make the #recession worse, crushing the dollar and causing consumer prices to skyrocket.”
The spread between 3-month and 10-year bonds is around 80 basis points, the largest since 2001 and a worrying harbinger of recession.
According to a study by the San Francisco Federal Reserve, a persistently inverted yield curve has preceded all nine recessions the U.S. economy has suffered since 1955, making it a remarkably accurate barometer of financial market sentiment.
In September last year, the entrepreneur warned that a sharp increase in interest rates would lead to long-term deflation.
“A bigger Fed rate hike risks deflation,” the SpaceX CEO said.
The consequences of deflation can be devastating to the economy, as falling prices encourage households to delay purchasing decisions and wait for further price reductions.
This, in turn, can lead to a drop in overall consumption and an increase in inventories in companies that can no longer sell their products. In response, they reduce production and investment.