- The Fed is ignoring deflationary signals in an hark back to start of the Great Depression, tweeted Cathie Wood.
- The Ark boss warned of a similar downturn if the Fed doesn't pivot from its monetary tightening path.
The Federal Reserve runs the risk of sparking a major US downturn — just like the Great Depression — if it does not pivot from its monetary tightening path despite cooling inflation, Ark Invest CEO Cathie Wood has said.
Wood drew parallels between the current situation and the events that led up to the Depression in 1929, in a string of tweets Saturday.
In June 1920, the global economy was just working its way out of the impact of World War I and the Spanish flu outbreak of 1918, which contributed to supply chain and other shocks that pushed up inflation to 24%, Wood said.
To cool inflation, the Fed hiked interest rates sharply from 1919 to 1920, from 4.6% to 7%, she further noted. This took inflation down to about negative 15% in June 1921.
In reaction to the deflation, the Fed then lowered rates sharply from May 1921 to July 1922, prompting a massive rally in the stock markets and "tripping the switch for the Roaring Twenties," she said.
—Cathie Wood (@CathieDWood) November 12, 2022
The central bank then raised rates in 1929 to curb market speculation — a move which, together with the Smoot-Hawley Tariff Act — contributed to the Great Depression.
—Cathie Wood (@CathieDWood) November 12, 2022
Wood said in her thread on Twitter she saw "echoes of the same" in Fed's policies now as the central bank is "ignoring" deflationary signals.
This time round, the Fed has already raised interest rates 16-fold — which Wood felt was a "serious mistake." The Fed has hiked interest rates from the 0.25% to 0.50% range in in March to the 3.75% to 4% range now to cool inflation, which rose 7.7% year-over-year in October, according to the Bureau of Labor Statistics.
But Wood expects broad-based inflation to turn negative in 2023, she said.
"If inflation drops below the Fed's 2% target and economic activity disappoints, then interest rates are likely to surprise on the low side of expectations next year, ushering in this century's rendition of the Roaring Twenties," she said.
She also drew parallels between the Smoot-Hawley Tariff Act and the CHIP Act that was signed into law in August to bolster chip manufacturing in the US, warning it could impact the economy.
—Cathie Wood (@CathieDWood) November 12, 2022
The price of Wood's flagship Ark Innovation exchange-traded fund (ARKK) shot up 15% for its biggest gain on record on Thursday, after the October US inflation data. The lower-than-expected reading gave investors hope the Fed would pull back on its aggressive rate hikes, which have dampened appetite for the tech stocks Ark invests in.