The main reason for the Federal Reserve’s hawkish stance has been inflation, and fears about an increase in inflationary pressure have dampened market sentiment, leading to a large-scale sell-off in equities.
Ark Invest founder Cathie Wood, however, has held the belief that the U.S. Federal Reserve may be erring on the side of caution. After raising a deflation concern last week, the fund manager has, once again, made an argument for an impending deflation..
What Happened: Quote-tweeting Tesla Inc. TSLA CEO Elon Musk’s comment that “a major Fed rate risk risks deflation,” Wood said deflation is in the pipeline. She highlighted the big pullback in prices of various items from their post-COVID peaks.
The celebrity stock picker noted that the Manheim used car prices fell 4% in August, around 50% at an annual rate. Used car prices have fallen 10% since peaking in January, she added.
If electric vehicles are as disruptive as we believe, these prices could be cut in half and drop to the lowest level since the global financial crisis of 2007-2008, Wood said.
She also sees a threat to the over $1 trillion in U.S. auto debt if residual values deteriorate. The fund manager noted that in 2008-09 individuals prioritized auto loan payments over mortgages so that they could commute to work and stay employed.
“This time around, thanks to ride-hailing — and soon less expensive autonomous taxis — individuals are unlikely to prioritize auto debt payments over mortgage payments, which could turn backward-looking quant models upside down,” she warned.
Why It’s Important: The Labor Department is set to release its consumer price inflation report for August on Tuesday at 8:30 a.m. ET. The year-over-year rate of headline inflation is widely expected to decline from 8.5% in July to 8.1% in August. The annual core rate, which excludes food and energy, may have accelerated from 5.9% to 6.1%.
After peaking at 9.1% in June, the headline inflation softened to 8.5% in July, raising hopes that there will be a let-up, providing scope for the Fed to pause.
The Federal Reserve Open Market Committee will convene for a 2-day meeting on Sept. 20-21 to decide on the fed funds rate. Tuesday’s CPI report will be the last major data the Fed would consider for making its decision.
The Fed began its monetary policy normalization earlier this year, raising rates by 25 basis points in March, 50 basis points in May, and by 75 basis points each in June and July. Economists are divided over the impact the rapidly rising rates can have on growth as the economy navigates through several uncertainties.
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