World-renowned billionaire, Elon Musk, has once again aired his concerns about a looming economic issue—deflation. According to Musk, the constant rate hikes by the Federal Reserve might put the U.S. economy in a precarious situation. Musk first voiced his concerns in the matter in September 2022.
A major Fed rate hike risks deflation
— Elon Musk (@elonmusk) September 9, 2022Federal Reserve’s Current Stance and Economic Predictions
On June 14, as predicted, the Federal Reserve kept its key rates stable, marking the first such instance since March 2022. However, it also hinted towards two potential quarter-point rate hikes by year’s end. The Federal funds rate target currently stands at 5% – 5.25%, a figure anticipated by most experts. Jerome Powell, Fed Chairman, affirmed during a press conference that the Federal Open Market Committee (FOMC) members are inclined towards further interest rate increases.
New economic forecasts present a median rate increase to 5.5% – 5.75% by December end, according to monetary officials. Such an assertive policy aims to control inflation levels, unseen for several decades. However, this approach could potentially hasten economic slowdown, warn some economists.
The Emerging Threat
Musk, however, asserts that the Fed’s decisions might trigger a significant economic issue—deflation. In other words, a decrease in the prices of most goods and services. He recently reiterated his warnings about deflation’s impending arrival.
Genevieve Roch-Decter, a certified financial analyst and former small-cap money manager, asserted on Twitter on June 14, “Money supply growth leads to inflation. Now that M2 money supply growth is negative, inflation will cool quickly.” She pointed out that the new risk might be deflation, a sentiment Musk concurs with. “Deflation is coming,” warned the Tesla CEO.
Deflation is coming
— Elon Musk (@elonmusk) June 14, 2023Understanding Deflation
Deflation, the antithesis of inflation, denotes a persistent decrease in general price levels. Although it might sound advantageous, deflation can lead households to delay purchases anticipating further price drops. This in turn can worsen borrowers’ financial conditions, economists caution.
This behaviour might lead to lower overall consumption and increased company inventories, causing production and investment cuts, including layoffs. It can result from increased productivity or decreased demand.
Historical Context of Deflation
Deflation instances are rare in affluent countries, with only two occurrences in the past century: the 1930s’ deflation affecting the U.S. and Europe, and the late 1990s’ deflation impacting the Japanese economy.
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As the world’s richest man, Musk’s predictions have substantial weight. However, only time will reveal the true consequences of the Federal Reserve’s interest rate hikes, and whether deflation is indeed on the horizon.
Source: MSN.
