The US Federal Reserve is risking weak economic growth throughout the current year due to the backward, “draconian” increase in interest rates, warned the most famous bull in the technology sector of Wall Street.
ARK Invest founder Kathy Wood, who has become famous for her betting bets on subversive technologies led by companies such as Tesla, has argued that the Fed should moderate its policy as top economic indicators flash red.
These included speculative bets indicating an expectation of rising bankruptcy through securities called credit default swaps (CDS) and a flattening of the yield curve – the demand of premium investors to hold 10-year bonds against two-year bonds.
“It ignores deflationary and dangerous signals,” he tweeted on Sunday, arguing that the consumer price index was delaying real-time developments. Some economists say that setting a policy using this type of data is tantamount to driving looking in the mirror.
“Consumer sentiment is lower today than it was during the global financial crisis of 2008-09 and the two recessions of 1980-82, when the Fed chairman [Paul]”Volcker was drowning 15% plus inflation at 20%,” he added.
Volker is best known for taming double-digit inflation with his hawkish policies in the early 1980s. Street through the so-called “Greenspan Put”.
Volcker doubled the Fed funds from 10% to 20% in less than a year. Powell’s Fed has increased the funds rate 7-fold in the last year and is pointing to another double from here. Its moves already are more draconian than Volcker’s.
— Cathie Wood (@CathieDWood) June 19, 2022
Wood and many of her colleagues have benefited from the legacy of the latter ‘s easing policy rates that have pushed up asset prices, especially for high – growth stocks favored by ARK Invest.
The Fed’s next chairs, including Ben Bernanke and Janet Yellen, have preferred to keep interest rates low since inflation remained relatively lukewarm. Incumbent President Jay Powell even said in March 2021 that he expected interest rates not to rise “at least until 2024.”
This forecast had a very short lifespan. Instead, it started in March this year with an increase of 25 basis points and has since increased them to 1.75% from last week, with the aim of cutting inflation.
For Wood, this rate was even stronger even if the absolute number remains small and the real indicators after the inflation calculation remain deeply negative and therefore stimulating for the economy.
“Volcker has doubled the Fed’s capital from 10% to 20% in less than a year. “The Powell Fed has raised interest rates seven times in the last year and shows another double from here,” he wrote. “His moves are already more draconian than Volcker.”
Submerged value of ARK Innovation
Wood said CDS prices had reached levels they had not seen since COVID first crossed its borders into China, and a flattening of the yield curve, and even more so a reversal of the curve, usually foreshadowed a recession in Buy.
This is because the Fed can usually anchor expectations at the short end of the curve by controlling the Fed’s interest rate. By comparison, longer maturities in the bond market reflect the broader market inflation expectations. If 10-year yields fall, it indicates that investors are pricing into an economic slowdown.
The Fed seems to be worried more about its legacy than the economy: it is ignoring deflationary and dangerous signals. Relying on lagging inflation indicators like the CPI, Fed Governor Waller is calling for another hike of 0.75% in July.
— Cathie Wood (@CathieDWood) June 19, 2022
“In our view, the United States fell into recession in the first quarter. “If the huge inventors inflate real GDP in the second quarter, they will loosen up and hurt growth for the rest of the year.”
A recession is defined as two consecutive quarters of shrinking economic production. Officially stated by the National Bureau of Economic Research (NBER).
Stocks are considered cyclical white noise that can contribute to or reduce growth in any given quarter, but are usually cleared on an annual basis. Any data on GDP for the second quarter resulting from the increase in inventories will be considered weak on a qualitative basis.
Wood may urge the Fed to slow down in its own interest as many of its equity stocks plummeted in November 2021 after the Fed signaled it was no longer convinced that inflation was transient.
ARK Innovation, its flagship stock market, fell more than 23% last year and has fallen 60% so far in 2022.
“The Fed seems to be more concerned about its legacy than its economy,” he wrote.
This story was originally featured on Fortune.com