Cathie Wood Says Fed Will Have To Adjust Now As Deflation Looms Large: 'We'll Be On The Other Side Of The Horror Show We Just Went Through'

Cathie Wood, in a media appearance Friday, shed light on her take on how the Federal Reserve has handled inflation and monetary policy in the current tightening cycle.

Deflationary Pressure Taking Hold: The Fed has jacked up interest rates 21-fold and all long-duration assets were slaughtered last year, Wood said in an interview with CNBC. Bonds, which are long-duration assets and flight-to-safety vehicles, had their worst year in 2022 since some time in the 1700s, she noted.

If that was going to happen to bonds, which are usually flight to safety just because they were long duration, that was going to happen to Ark in spades and it did," the fund manager said.

The market is now starting to look to the other side of the interest rate increase and inflation is crumbling, the stock picker said. Wood noted that the leading indicators of inflation, are coming down rapidly, adding "We're going to see deflation which we’re already seeing it in many places."

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Fed Has To Relent: “The Fed will have to adjust and we’ll be on the other side of the horror show we just went through," Wood said.

The fund manager said during COVID-19, she predicted inventory shortages that would lead to supply chain problems and, in turn, trigger inflation. The Russian invasion of Ukraine caught her unawares, she said.

"But I think when history is the judge, and it will be, that history will judge the inflation we went through, as a result of a massive supply shock to the system," the Ark Invest founder said.

While former Treasury Secretary Larry Summers and economist Mohamed El-Erian have used the 70s scenario as an analogy, Wood said she uses the 19 teens, which saw the Spanish flu and World War I.

"We were on the gold standard, so the money supply had to fall as inflation went up," she said.

Wood noted that inflation went up to 24% in June 1920s, dropping to -15% in June 1921. Then, the world moved into the "roaring 20s" due to massive innovations, including the telephone, electricity, and automobile.

"This period is more like that period than the 70s and again history is the judge," she said.

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