According to the asset management company ARK, deflation is inevitable if the US Federal Reserve really persists in raising interest rates in the United States. Moreover, ARK has shared its analysis with the Fed by providing it with its analysis of the country’s economic situation and its forecasts.
Cathie Wood questions Fed decision on interest rate hike
Cathie Wood, the founder of the asset management company ARK sent an open letter to the American Federal Reserve (Fed).
This letter was also published on the ARK Invest website. In her letter, Cathie Wood warns the Fed about what could happen if it persists in raising interest rates.
According to Cathie Wood, this political decision, that is to say the continuation of the rise in interest rates, would cause deflation. To support her analyses, the founder of ARK Invest has provided some data.
As a reminder, the Federal Reserve had announced a probable increase in interest rates from 2 November. If this were to be the case, it would be the fourth consecutive increase of the year 2022.
Still for Cathie Wood, this Fed decision is a mistake. In her letter, the boss of the asset management company ARK explains that commodity prices indicate that deflation is a greater economic risk than inflation.
This, because the Federal Reserve wants to make this political decision by putting in the balance, only two elements which are: global inflation and employment.
To corroborate everything, the founder of ARK Invest explains in her letter that the prices of raw materials are leading indicators in the transformation process. Most commodity prices peaked, except for food and energy.
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The Federal Reserve insists on raising interest rates
To date, the Federal Reserve has passed, unanimously, three consecutive increases in interest rates of 0.75 percentage points, followed probably soon by a fourth.
Indeed, it should proceed to an increase again during its meeting of November 2, 2022. Concretely, during this meeting, the Fed must once again vote unanimously for the increase in interest rates.
For Wood, the 13-fold increase in interest rates over the past six months could very well turn into a 16-fold increase after the meeting. This raises the risks of a deflationary collapse.
In economics, extreme inflation and deflation are two harmful situations for the economy. The first (inflation) increases the cost of living and suppresses consumer spending. The second (deflation) indicates a drop in demand and can lead to a severe economic recession.
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