Cathie Wood Says 'Fed Seems To Be Playing With Fire'; Aggressive Interest Rate Hikes Could Be A 'Mistake'

The Federal Reserve began to hike the fed funds rate last month, after maintaining it at very accommodative levels since the outbreak of the pandemic in early 2020. The action was panned by a few sections, who opined that monetary policy normalization, especially at a time when geopolitical risks abound, may hurt the fledgling post-pandemic recovery.

Ark Invest founder Cathie Wood weighed in on the near-term trajectory of the funds rate and its implication for the economy.

Yield Curve Inversion Portends Tough Times Ahead: The yield curve, which is the differential between the yields on the benchmark 10-year treasury note and the shorter-term two-year treasury note, inverted on Friday. This rendered the yield on the short-term note higher than that for the 10-year note for the first time since 2019.

The trigger was a strong non-payrolls report released by the Labor Department for March.

The development defies the logic that holders of longer-term debt instruments should be compensated with higher returns than for shorter-term instruments, given the relatively higher risk borne in the former scenario.

The inversion signals that the longer-term outlook for the economy is not-that-optimistic, potentially portending a recession.

Related Link: Robust Jobs Report Lifts Stocks, Bond Yields

Higher Inflation & Rock Bottom Consumer Sentiment – Perfect Recipe For Disaster: Wood expressed her opinion on the evolving macroeconomic situation in a series of tweets. She tweeted that the inversion suggests the Fed is going to continue to raise interest rates as "growth and/or inflation surprise on the low side of expectations."

She called such a development as a "mistake."

The Ark Invest founder noted that the 10-year to 3-month yield curve is steep as the Fed is signaling aggressive interest rate hikes due to the inflationary pressure triggered by supply shocks.

"Inflation is a highly aggressive tax that is killing purchasing power and consumer sentiment, Wood said.

Consumer sentiment has plunged below the level that was prevailing at the depths of the coronavirus crisis and has entered the territory last ventured into during the 2008-09 Great Recession, which was triggered by the global financial crisis, Wood said.

The metric, as measured by the University of Michigan's consumer sentiment index, is approaching the lows seen in the 1980s when inflation and interest rates hit double digits, she added.

Wood highlighted the fact that the economy succumbed to recession in each of these periods. Not only the U.S., but Europe and China are also in "difficult straits," she added.

"The Fed seems to be playing with fire," she concluded.

Related Link: How To Invest Like Cathie Wood

Photo: Courtesy of Mike Cohen on Flickr