Elon Musk warns the Fed could send prices spiraling downward if it hikes interest rates too sharply this month
- Elon Musk cautioned that a major rate hike by the Federal Reserve could spark deflation.
- Musk bemoaned cost pressures at Tesla and SpaceX in March, but recently argued inflation has peaked.
If the Federal Reserve raises interest rates too aggressively this month in a bid to crush inflation, it could send prices spiraling downward, Elon Musk has warned.
"A major Fed rate hike risks deflation," the Tesla and SpaceX CEO said in a tweet on Friday.
The Fed has lifted its benchmark rate from near zero in March to between 2.25% and 2.5% today, in response to inflation surging to a 40-year high this year. The central bank hasn't ruled out a third consecutive hike of 0.75 basis points later this month.
Higher interest rates make saving more appealing and borrowing more expensive, which helps to reduce aggregate demand and therefore upward pressure on prices. However, excessive hikes can lead to prices falling, which tends to erode corporate profits and result in slower economic growth and higher unemployment.
Musk noted in March that both Tesla and SpaceX were seeing sharp cost increases for raw materials and logistics.
In July, after Tesla had raised the prices of its vehicles several times, Musk suggested the automaker could cut its prices if inflation cooled. About a month later, he asserted that US inflation had peaked, and predicted the economy would slump into a mild recession lasting about 18 months.
Other commentators have sounded the deflation alarm in recent months. Cathie Wood, the CEO of Ark Invest and a Tesla bull, has repeatedly argued that technological advances would lower production costs and therefore prices, and consumers would defer purchases until that happened.
Michael Burry, the investor of "The Big Short" fame who bet against Tesla and questioned Musk's stock sales last year, has predicted that retailers would slash prices to get rid of excess inventory in the coming months, pulling down prices and ultimately spurring the Fed to reserve course and cut rates.
Meanwhile, Nobel Prize-winning economist Richard Thaler recently pointed out that Russia's invasion of Ukraine has driven up food and fuel costs, while China's continued COVID-19 lockdowns have disrupted global supply chains. He suggested that if the war ends and China ends its restrictions, that would relieve upward pressure on prices and potentially result in deflation.