The US economy could be grappling with deflation in the next 6 months, and the Fed could be forced to pivot in the face of demand destruction, ARK Invest's Cathie Wood says
- The US economy could be grappling with deflation in the next six months, Cathie Wood said Tuesday.
- She warned the Fed could be underestimating demand destruction, meaning future rate hikes won't be necessary.
The US economy could be grappling with deflation in the next six months, and the Fed could soon be forced to pivot from its aggressive policy, according to Ark Invest's Cathie Wood.
Fed officials have been battling inflation all year, and have been trying to pull it down from June's Consumer Price Index reading of 9.1%, a 40-year high.
Prices eased slightly to 8.3% in August, but Fed officials have said they will stay vigilant and keep hiking rates until the data shows a meaningful decline. But that hawkishness might not be necessary, Wood said, as demand in the economy is already starting to slow down:
"We think the inflation rate is going to be surprisingly low. We would not be surprised to see deflation month to month sequentially for a number of months during the next six months," Wood said in an interview with CNBC on Tuesday. "I think they do not appreciate how much demand destruction has taken place out there," she added of the Fed.
She pointed to a slowdown in energy markets, with sky-high prices forcing demand for gasoline down to 25-year-lows. And while Fed officials remain hawkish over the CPI and the unemployment rate, experts have pointed out those indicators lag behind actual inflation in the economy.
Meanwhile, indicators that account for much of the high inflation readings are falling across the board, such as retail and commodity prices. Markets are also pricing in falling inflation, with expectations for sub-2% inflation in 2024, according to JPMorgan.
Other commentators have warned excessive hiking could send the economy spiraling into a recession, but Wood believes the US is already in one. She also says inflation already peaked in February, when Personal Consumption Expenditure inflation, the Fed' preferred measure, clocked in at 5.3%.
"We think that inflation during the years ahead is going to surprise significantly on the low side of expectations," she added, predicting a Fed pivot could be in sight.
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