The U.S. Federal Open Market Committee starts a two-day monetary policy meeting on Tuesday. Ahead of it, Tesla Inc. (NASDAQ:TSLA) CEO Elon Musk took to Twitter to comment on inflation and interest rates.
What Happened: Ark Invest’s Cathie Wood tweeted last week that the Biden administration is going by what prevailed in the 1970s — when the Fed under Larry Summers had launched a relentless fight against inflation by hiking the policy rate. Inflation then had raged unhindered for 15 years before the Fed got into action, she said.
Wood warned of a looming deflation by pointing out sharp declines in prices of different items from pre-COVID levels.
Musk's Responds: Replying to the money manager, Musk tweeted, “Yes, the fundamental error is reasoning by analogy, rather than first principles.”
Yes, the fundamental error is reasoning by analogy, rather than first principles
— Elon Musk (@elonmusk) September 19, 2022
One of Musk’s followers chimed in by sharing a graphic of past inflationary trends and suggested the current scenario is more like 1949 when inflation spiked to 10% only to quickly retrace to -2.5% within 12 months.
“Whether [Federal Reserve] waits a month or pivots, won’t matter. Deflation hits them on the chin bc they use old data,” he said.
Tagging the Twitter user, Wood and Federal Reserve, Musk noted that there was too much latency in Fed decisions. “Problematic in a fast-changing world,” he added.
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Commenting on Musk’s take on the economy and monetary policy, crypto YouTuber Matt Wallace revived calls for making Musk the president. “Elon Musk for President,” he tweeted.
Elon Musk for President
— Matt Wallace (@MattWallace888) September 19, 2022
Future Fund’s Gary Black echoed a similar sentiment as that of Musk and Wood. “The Fed is headed down the wrong path, by raising rates aggressively to fight a supply-driven inflation caused by Covid, which has already peaked,” he said.
“The Fed is making the mirror image mistake it made in 2021 allowing rates to stay low for too long, by pushing up rates too fast now.”
Benzinga’s Take: The argument that the Fed may be acting on old data is not totally unfounded. The August producer price inflation showed a second straight month of drop and the slowest pace of year-over-year increase amid the sharp pullback in energy prices.
Inflation expectations are also easing, as evident from the preliminary results of the University of Michigan’s consumer sentiment survey. The one-year inflation and five-year inflation expectations came in at 4.6% and 2.8%, respectively, both readings dropping to the lowest levels in a year.
Wood herself has in the recent past blamed the Fed for worrying more about its legacy than the economy.
The Fed could have been inspired into moving too fast on inflation because economic indicators such as employment are showing strength. Credit Suisse analysts see the Fed raising rates at least until early 2023 and view 4.25%-4.50% as terminal rates compared to the prevailing rates of 2.25%-2.50%.
