Cathie Wood, the founder of ARK Investment Management, has said the current U.S. monetary policy is significantly more restrictive than in the 1980s when, to kill inflation, former Federal Reserve Chair Paul Volcker had pushed the Fed funds rate up two-fold from 10% to 20%.
In comparison, Jerome Powell and his team have increased it 13-fold from 0.25% to 3.25% to "slay the dragon," Wood said.
“By the time this Fed tackled the current surge, inflation had been brewing for ~15 months, not 15 years. Now, it is 'keeping at it' with a sledgehammer 13 times more powerful than the one Volcker wielded in the ‘80s,” she said.
By the time this Fed tackled the current surge, inflation had been brewing for ~15 months, not 15 years. Now, it is “keeping at it” with a sledgehammer 13 times more powerful than the one Volcker wielded in the ‘80s. In so doing, the Fed could undermine its legacy.
— Cathie Wood (@CathieDWood) September 26, 2022
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Yield Surge: Wood also pointed out that under Volcker, Treasury yields rose 1.6 times, from 10% to 16%, while under Powell, it has been a whopping 7.4 times. “Risk aversion is pummelling all assets except cash, but the Fed seems fixated on hiking rates another 100+ basis points to protect its legacy,” she tweeted.
What Wood seems to underscore is the accentuated tightening in yields which is not in line even with a rising interest rate regime. Bond markets tend to have a bad phase when interest rates are rising, but such a surge in yields is taking a heavy toll on the fixed income industry.
“Meanwhile, commodity prices as measured by Refinitiv’s CRB index have dropped ~42% since their peak in mid-2008, ~25% since their lower peak in 2011, and ~19% since an even lower peak earlier this year,” Wood tweeted.
Her comments come amid a bloodbath in global stock and commodity markets, triggered by the Federal Reserve's aggressive rate hikes and projections.
The Nasdaq index has lost nearly 25% in the last six months.
Dollar Dilemma: Wood also explained how the dollar’s parabolic move has been devastating to the rest of the world and should come back to bite U.S. competitiveness, jobs, and economic activity, forcing the Fed to pivot.
“Last week, Japan and China sold dollars to protect their currencies against a parabolic dollar that is causing significant harm to the global economy,” she tweeted.
Price Action: The SPDR S&P 500 ETF Trust (NYSE:SPY), which tracks the S&P 500 has lost over 23% since the beginning of the year. The largest ETF, which was founded in 1993 and is set to turn 30 in January 2023, has assets to the tune of over $331 billion. Since its inception, the fund has given an annual return of 9.73% as of the end-August data.
In comparison, Cathie Wood’s ARK Innovation ETF (NYSE:ARKK) has lost over 61% since the beginning of the year.
Photo courtesy: Ark Investment Management
