Musk Joins Cassandras with Gloomy Predictions About the Economy

The continuous raising of interest rates by the Federal Reserve to tame inflation has become a divisive topic.

The Federal Reserve’s fight against inflation, which is at its highest in 40 years, is a source of much controversy. 

There are those who believe that by raising interest rates so aggressively for a few months now, the central bank is doing what is necessary to tame rising prices for goods and services. 

‘Biggest Policy Mistakes’

But there are also those who think the Fed has failed and risks, if it continues, causing an even bigger problem than the one it is trying to solve. This latter camp is beginning to make itself heard more and more. 

Unsurprisingly, the Fed raised its rates by 75 basis points at the end of its monetary meeting on Sept. 21 and said it expected to make further hikes. The Fed funds rate is in a range of 3%-3.25%, and is expected to increase at 4.5% by the end of 2022.

“The last two years [are] one of the biggest policy mistakes in the 110-year history of the Fed, by staying so easy when everything was booming,” Wharton professor Jeremy Siegel told CNBC on Sept. 23. 

The video of the interview is going viral. It arouses many comments, and often unfavorable to the Fed, on social networks. Siegel is visibly very angry, and it shows in his tone. He’s very animated.

“When we have all commodities going up at rapid rates, Chairman Powell and the Fed said: ‘we don’t see any inflation. We see no need to raise interest rates in 2022.’ Now when all those very same commodities and asset prices are going down, he says: ‘Stubborn inflation that requires the Fed to stay tight all the way through 2023.’ It makes absolutely no sense to me whatsoever, way too tight!” Siegel added.

For Siegel, inflation has begun to subside. He points out that the prices of oil and raw materials began to fall to find themselves at levels more seen since the invasion of Ukraine by Russia on Feb. 24. Real estate prices are also falling, he said.

“The only thing that’s not going down is wages, and by the way, wages are in catch up mode. Don’t argue their pushing inflation, they’re lagging inflation. I mean, workers are trying to get a little bit back of what the inflation happens to be,” Siegel said.

‘Major Recession’

“Why is he putting the burden on these working people, on the employed people, when every other commodity price is going down,” he continued.

“I think the Fed is just way too tight. They’re making exactly the same mistake on the other side that they made a year ago,” Siegel said.

He thus warned that if the Fed continued with its aggressive rate hike policy in 2023, “you can make sure that there’s a major recession on the other side.”

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“I am very upset. It’s like a pendulum. They were way too easy through 2020 and 2021, and now ‘we’re going to be real tough guys until we crush the economy.’ I mean, that is just to me absolutely, poor monetary policy would be an understatement,” Siegel lambasted.

Elon Musk, the richest man in the world and CEO of Tesla, visibly shares the criticisms against the Fed and the doomsday scenario painted by Siegel. He indeed commented on the video of Siegel saying that the latter had hit the nail on the head.

“Siegel is obviously correct,” Musk commented.

Musk’s positioning is not a real surprise since the tech tycoon had warned in early September that a rate hike of 75 basis points or 0.75% was likely to cause deflation. He reiterated that warning just days before the Fed announced its decision.

Deflation is the opposite of inflation. It is characterized by a continuous fall in the general level of prices. It can encourage households to postpone their purchasing decisions as they wait for further price declines, economists say. The consequences can be devastating as overall consumption slumps. Then, companies that can no longer sell their products reduce production and investment.

Above all, deflation can cause borrowers’ financial situation to deteriorate. That’s because the real, or inflation-adjusted, cost of debt increases because loan repayments generally aren’t indexed to inflation. So companies are less able to invest and households are less able to buy necessities and consume.

Musk believes the Fed is very slow to react to the risks threatening the economy.

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