Ark Invest's Cathie Wood says deflationary forces could pressure the Fed to make a policy reversal

Published Tue, Jul 12 20223:34 PM EDTUpdated Tue, Jul 12 20224:28 PM EDT

Ark Invest's Cathie Wood said Tuesday that the Federal Reserve is making a policy mistake by raising rates aggressively to tame inflation that she believes to be short-lived. "We are getting all kinds of catalysts, a list of them ... which should give the Fed a pause," Wood said in an investor webcast. "If not pause, it should cause an entire pivot and reversal in policy. They are making a mistake. The markets are telling us they are making a mistake. I think something will break that matters to them." Last month, the Fed raised its benchmark interest rates three-quarters of a percentage point to a range of 1.5%-1.75% in its most aggressive hike since 1994. The Fed's move came with inflation running at its fastest pace in more than 40 years. However, the innovation-focused investor listed a number of leading indicators that point to deflationary forces instead of inflationary. First, she said the dollar index, which has moved up by double digits this year, is a "total anti-inflationary force." Next, oil declining more than 20% month to month as well as the 10-year Treasury yield having trouble staying over 3% also told Wood that inflation fears are overblown. Moreover, she noted that gold, traditionally an inflation hedge, is about to move below a two-year trading range. "That will confirm in my mind that deflation is the greater risk here, not inflation," Wood said of gold prices. Wood reminded investors of recent comments from Kansas City Fed President Esther George, who dissented last month against the central bank's jumbo rate hike. George, speaking at the Mid-America Labor/Management Conference, warned Monday that moving interest rates too fast raises the prospect of " oversteering ." Ark's Wood said inflation should ease quickly in the next few months as inventory issues resolve. That view is contrary to the conventional wisdom that rising price pressures have been embedded in the broader economy and could be sustained for a while. "I really think this is more of an inventory problem that can be cured by cutting prices aggressively," Wood said. "I think we could be out of this when economists are finally declaring it a recession. That's about how bad the call has been out there that inflation was embedded and recession was a question mark." Wood's disruptive technology darlings have been among the biggest losers this year in the face of rising rates. Teladoc Health and Zoom Video have dropped about 57% and 41%, respectively, in 2022. In addition, Roku has slid more than 60% this year. Her flagship active fund Ark Innovation ETF (ARKK) is off 53% year to date. "If we are right and inflation unwinds pretty dramatically during the next six months, that should help growth," Wood said.

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