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Cathie Wood Sees Deflation, Lays Blame on Powell

Asset manager Cathie Wood reiterated that the Fed is looking at the wrong indicators, finding that prices increased when they actually declined.


Dan Weil

Publish date:

Sep 8, 2022 12:19 PM EDT

For months famed investor Cathie Wood has said that the Federal Reserve should cease raising interest rates, that the economy is seeing deflation rather than inflation and that it’s in recession.

She’s not backing off any of it — and she’s now giving the business to Fed Chairman Jerome Powell on Twitter.

“The Fed seems to responding to covid-related supply shocks spanning 15 months the same way that [former Fed Chairman Paul] Volcker battled inflation that had been brewing and building for 15 years,” the chief executive of Ark Investment Management tweeted.

Volcker sent interest rate soaring in the early 1980s to quell double-digit price increases.

Given the Fed’s current overshoot, “I would not be surprised to see a significant policy pivot in the next three to six months,” Wood said.

Powell and his colleagues are looking at the wrong data, Wood said. “The Fed is basing monetary policy decisions on lagging indicators: employment and core inflation,” she tweeted.

Non-farm payrolls rose 315,000 in August, and the core personal consumption expenditures price index climbed 4.6% in the 12 months through July.

“Leading inflation indicators like gold and copper are flagging the risk of deflation,” Wood said. “Even the oil price has dropped more than 35% from its peak, erasing most of the gain this year.” Gold prices have slid 6% so far this year. “Inflation is turning into deflation,” she said.

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Getting back to the two Fed chairmen, in an August speech Powell invoked Volcker’s name four times, Wood said.

But inflation was much more entrenched in Volcker’s era, she noted. “Not until Volcker took charge [of the Fed] in 1979, 15 years after the Vietnam War and Great Society began, did the Fed attack inflation decisively,” Wood said.

“In contrast, faced with a two year supply-related inflation shock, Powell is using Volcker’s sledgehammer and, I believe, making a mistake.”

Wood compared some of the numbers for rate increases then and now. “The Fed has raised the fed funds rate 10-fold from 0.25% to 2.5%, five times Volcker’s two-fold increase from 10% to 20% in the early ‘80s,” Wood said.

At that point, “consumers and businesses had been adjusting to inflation for 10-15 years,” she said. “In contrast, today they are in shock. Housing is unraveling.”

Meanwhile, Wood’s flagship Ark Innovation ETF  (ARKK)  has slumped this year, dropping 55%, as its technology stocks tumbled.

Wood has defended herself by noting that she has a five-year investment horizon. Through May 9, the fund’s five-year return beat that of the S&P 500.

But the five-year annualized return of Ark Innovation totaled only 5.81% through Sept. 7, less than half the S&P 500’s 12.03% return. 

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