Markets are falling as investors worry about the consequences of sharp interest rate increases by the Federal Reserve, designed to combat the inflation rate that is the highest in 40 years.
Investor fever was marked by the stock market crash on September 13 that followed a report confirming that inflation was not abating.
A hotter-than-expected inflation report wiped out nearly $1.6 trillion from the S&P 500, marking the worst session for US stocks since June 2020.
The route particularly affected risky assets such as technology clusters. The Nasdaq 100 lost more than 5.5%.
The inflation report boosted investor expectations that the Federal Reserve will raise interest rates by at least 0.75 percentage points, or 75 basis points, during its two-day meeting on September 21-22.
Core US consumer prices jumped 0.6% last month, buoyed not only by rising rents but also by accelerating pressures across a wide range of products and services. Data from the Bureau of Labor Statistics indicated that pressures have not yet peaked in the world’s largest economy.
0.25, 0.75, or 1 percentage point
The headline CPI for August is estimated to have risen 8.3% from a year earlier, down from the 8.5% pace recorded in July but faster than Wall Street’s forecast of 8.1%.
However, the report also raised bets that the Fed will raise a full percentage point, or 100 basis points.
“Today’s CPI report confirms the US has a serious inflation problem,” former Treasury Secretary Larry Summers commented on Twitter, one observer saying the Fed should go faster on its monetary tightening.
“It has been clear to me for some time now that a 75 basis point move in September is appropriate. And if I had to choose between 100 basis points in September and 50 basis points, I would choose 100 basis points to move on to enhance credibility,” added Summers, President Emeritus of the University of Harvard.
Elon Musk, CEO of electric car leader Tesla, says a rise of 0.75 point, or worse, a full point would choke the economy and cause a nightmare scenario of deflation. (TSLA) . Thus the billionaire proposes an increase of 0.25 percentage points.
“0.25% down,” Musk wrote on Twitter on September 14.
The businessman, who is also involved with three other companies — SpaceX, Neuralink and Boring Co — made the proposal after a Twitter user asked him what the Federal Reserve should do as it balances fighting inflation and avoiding disaster for the economy.
Early signs of deflation?
It all started with a tweet from Cathy Wood of Ark Investment Management warning of early signs of deflation. The star financier noted that the prices of many raw materials have fallen sharply recently.
“A shrinkage in the pipeline,” Wood warned. Heading for PPI, CPI and PCE Deflator: From post-COVID price peaks, wood -60%, copper -35%, oil -35%, iron ore -60%, dirham -46%, corn -17%, Baltic rates Charging -79%, gold -17%, silver -39%.”
“Exactly, this is neither cryptic nor classified,” Musk commented.
What should the Fed do? asked a Twitter user.
This is the second time in less than a week that Musk has warned of a massive Fed rate hike.
On September 9, the influencer CEO, who has nearly 106 million followers on the social network Twitter, warned that if the central bank raises interest rates by 75 basis points, this move will lead to deflation, which means that most goods and services will become Ridiculously cheap.
“A big Fed hike risks deflation,” the billionaire said.
Basically, the CEO of Tesla says the Fed is going too far, too fast and should slow down.
Deflation is the opposite of inflation. It is characterized by a constant decrease in the general level of prices. Economists say it could encourage households to postpone their purchasing decisions while they wait for further price drops. The consequences can be devastating as overall consumption decreases. Hence, firms which are no longer able to sell their products reduce production and investment.
Above all, deflation can deteriorate the financial situation of borrowers. This is because the real or inflation-adjusted cost of debt increases because loan repayments are generally not linked to inflation. So companies are less able to invest and households are less able to buy necessities and consume.
Deflation cases are rare in rich countries. Only two cases of deflation have occurred in the last century: the 1930s, which affected the United States and then Europe, and the Japanese economy at the end of the 1990s.