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Tesla and SpaceX CEO Elon Musk has a dire warning for the US economy. Musk warns that another major federal reserve hike will result in deflation. Musk’s warning comes as the Fed is expected to move forward with another jumbo interest rate hike at the September FOMC meeting.
Musk is not the major figure to give a doom and gloom scenario for the US economy. Famous investor and the founder of Scion Asset Management, Michael Burry, predicted a 2008-level economic crisis in the US.
Meanwhile, economist Peter Schiff warns of hyperinflation. He believes that the Fed will pivot quickly to quantitative easing which will cause soaring inflation in the economy.
Breaking Down Elon Musk’s Deflation Warning
Elon Musk believes that another interest rate hike from the Fed will lead to deflation. Deflation is the decrease in the price of goods and services. Deflation can be caused by a multitude of factors such as greater productivity, lesser demand, or contraction of a nation’s money supply.
According to Musk, the current risk of deflation comes from the contraction of the money supply as the Fed is engaging in qualitative tightening to fight soaring inflation. Fed chair Jerome Powell already promised pain for households and businesses. He also revealed that the Fed will try and increase the dollar’s strength to help consumers fight inflation.
Deflation can be good news for consumers, who now have more purchasing power with the same amount of currency. However, if the phenomenon continues over a longer period of time, it can result in the shrinkage of the economy.
The Fed’s Next Interest Hike
The Fed’s next interest rate hike will be decided on the 21st of September 2022. As of right now, the CME fed Watch tool is showing a 91% probability of a 75 basis point hike. Goldman Sachs also changed its prediction from a 50 bps hike to a 75 bps hike.
The CPI data on the 13th of September will also have a major impact on the decision.
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