Ark Invest CEO Cathie Wood reiterated Tuesday that investors are overlooking the risk of deflation, warning that the Federal Reserve is making a policy mistake with aggressive rate hikes. “We are seeing a lot of deflation in the pipeline already,” Wood said in an investor webcast. “We do not believe that Chairman Powell’s task and this Fed’s task is anything like it was in the late ’70s and early ’80s.” The innovation investor referenced Fed Chair Jerome Powell’s recent speech in which he vowed to raise rates to fight inflation “until the job is done.” Powell used the phrase “keeping at it” twice during his remarks, which was the title of Paul Volcker’s 2018 memoir. Volcker, Fed chief under Presidents Jimmy Carter and Ronald Reagan, helped tame inflation in the 1980s with 20% interest rates that also crunched the economy. “During that period, we had worked up over 15 years to the inflation frenzy,” Wood said. “There was no stopping of inflation.” The period of time leading up to soaring inflation in the ’70s coincided with the end of the Vietnam War, the abandonment of the gold standard and the quadrupling of oil prices, Wood said. However, this time the situation is less dire, marked by temporary supply-chain disruptions triggered by the pandemic, she said. “This is more like a 15-month problem. To be using the same resolve as this point, we think it’s going to prove a mistake,” Wood added. Her comments came amid a big sell-off on Wall Street after a key August inflation report was hotter than expected. The August consumer price index report showed that the headline inflation rose 0.1% month over month, even with falling gas prices. Economists surveyed by Dow Jones had been expecting a decline of 0.1%. The widely followed investor still believes price pressures are poised to ease, led by rent price increases. She noted that the PCE core deflator, one of the Fed’s favorite inflation metrics, peaked 5.3% in February. “If we are right and the Fed does go up another 75 basis points on September 21, then the dollar will continue to break out to new highs and all of these commodity prices will continue to fall even more,” Wood said. The investor pointed to a number of leading indicators that are signaling inflation may have already peaked. She noted that gold, traditionally an inflation hedge, hit its high more than two years ago. Other commodities including lumber, copper, iron ore and oil have all dropped double digits from their high. She added that notable investors Elon Musk and Jeffrey Gundlach appeared to agree with her deflation call. The Tesla CEO tweeted on Friday, “A major Fed rate hike risks deflation.”
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