The Fed has raised interest rates four times this year for a total of 2.25 percentage points. That in turn has caused tumult in the bond markets, which by extension has pushed mortgage rates to above 6%.
Understanding why inflation is bad isn’t difficult: no one wants to pay more for goods and services when their wages and earnings are staying the same.
Deflation Is the Bigger Threat Wrapping one’s head around why deflation is an issue is a bit more challenging. For one, when people expect falling prices, they become less willing to spend, and in particular less willing to borrow, which can slow the economy even more than when borrowing is more expensive.
More broadly, falling prices typically leads to slower consumer spending, which is a major component of economic growth. Companies respond to falling prices by slowing down their production, which leads to layoffs and salary reductions.
Wood has at least one high-profile supporter of her view that the big surprise coming to investors and the markets is that prices are going down.
“We are getting some loud voices now accompanying us on this deflation risk,” Wood said in her investor webcast, naming both Tesla founder and CEO Elon Musk and well-known bond investor Jeffrey Gundlach in her remarks .
Musk responded to a Twitter thread with Wood Wednesday that the central bank should “drop 0.25%,” with the Tesla (TSLA ) CEO calling falling commodity prices “neither subtle nor secret” and tweeted to his 100 million followers that “a major Fed rate hike risks deflation.”