The Federal Reserve, under Chair Jerome Powell, raised the fed funds rate by a cumulative 3.75% points since it began tightening in March, with opinions divided over the legitimacy of the Fed action.
Ark Invest’s Cathie Wood took to Twitter on Wednesday to slam the Fed for leading the economy potentially into a recession with its inflation focus.
What Happened: The bond market appeared to signal the Fed was making a “serious” mistake, as yield curve inversion, measured by the difference between 10-year and 2-year Treasury yields, is currently about 80 basis points, Wood said.
The yield curve is more inverted now than at any time since the early ’80s when double-digit inflation was entrenched, the fund manager noted.
“I am wondering why economists are not highlighting that an 80bp inversion in the Treasury yield curve today is much more of a red flag for the Fed today than it was in the early ‘80s,” Wood said.
As a percent of the 3.5% yield of the 10-year Treasury note, it is 23% currently versus 5% of the 15% yield in the 1980s, she added.
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“Typically, an inverted yield curve is pointing to a recession and/or lower than inflation than expected,” Wood said. She saw deflation as a “much bigger” risk than inflation. Commodity prices and massive retail discounts have confirmed the viewpoint, she added.
Wood pointed out the anomaly of the Energy Select Sector SPDR Fund XLE approaching its all-time high even as oil prices have dropped from $130 a barrel to $74 a barrel. Pure play, early-stage innovation stocks, however, have dropped below their coronavirus lows, she said.
Why It’s Important: Higher fed funds target rate is a deterrent to growth, given all the other interest rates such as mortgage rates, are benchmarked against the central bank’s policy rate.
To make matters worse, the economy is left to face the brunt of geopolitical tensions, including the Ukraine war and the COVID-19 situation in China, which is often called the world’s factory.
Rate concerns are also weighing down on companies and the financial markets. Analysts have raised the specter of a corporate profit recession against the backdrop of slowing demand, production disruptions and rising costs.
The Fed recently signaled a thawing in its hawkish stance but consensus expectation is for a 50-basis-point hike at the upcoming Dec. 13-14 meeting. The central bank is widely expected to hike rates longer, although at a measured pace.
Photo: Tom Wang via Shutterstock
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