The Fed will also release its first quarterly forecasts since September. This will give an indication of where the central bank sees the US economy going in the next few years.
CME Group’s FedWatch continues to suggest next week’s announcement will be 50 basis point rate hike, with the Fed funds benchmark hitting between 4.25% and 4.5%, with a target rate of between 5% and 5.25% by spring, which is already largely reflected in futures trading.
Musk believes that if the Federal Reserve announces an interest rate hike as expected, it would be a huge mistake. The decision will plunge the economy into an even deeper recession than already expected, he just warned.
“If the Fed raises rates again next week, the recession will intensify significantly,” the billionaire said Dec. 9 in a message posted on Twitter.
CEO of electric vehicle manufacturer Tesla (TSLA Get a free report also agrees with star investor Kathy Wood, who continues to argue that continued interest rate hikes will cause deflation, a risk already cited by Musk last September.
“The bond market appears to be signaling that the Fed is making a serious mistake,” Wood wrote on Dec. 7. “At -80 basis points (as measured by the yield on 10-year versus 2-year Treasuries), the yield curve is more inverted now than at any time since the early 1980s, when double-digit inflation took hold.”
She added: “Usually Ann inverted yield curve points to a recession and/or lower-than-expected inflation. In our view, deflation is a much bigger risk than inflation. Merchandise prices and huge retail discounts confirm this view.”
To which Musk replied: “Absolutely” on December 9.
Deflation vs Inflation/Elon Musk
But economist Peter Schiff disagrees with the two influencers.
“Actually, the yield curve reflects investors’ expectations that the #Fed will be able to reduce #inflation to 2%,” Schiff commented on Musk’s post. “Investors are wrong. The only thing the Fed will be able to do is make the #recession worse, which will crush the dollar and cause consumer prices to spike.”
The spread between 3-month bills and 10-year notes is about 80 basis points, the steepest since 2001 and a worrisome harbinger of recession.
According to a study from the San Francisco Federal Reserve, a sustained inverted yield curve has preceded all nine recessions the U.S. economy has experienced since 1955, making it an extremely accurate barometer of financial market sentiment.
Last September, the entrepreneur warned that a huge increase in interest rates would cause long-term deflation.
“A big Fed rate hike risks deflation,” the SpaceX executive said.
The effects of deflation can be devastating to the economy, as falling prices encourage households to postpone purchasing decisions while they wait for further price falls.
This, in turn, can lead to a decline in overall consumption and an increase in inventories in firms that can no longer sell their products. In response, they reduce production and investment.
