Ark Invest’s Cathie Wood predicts inflation will see ‘major downside surprises’ in coming months

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After Federal Reserve Chair Jerome Powell seemed to reaffirm expectations of a third consecutive rate hike of 75 basis points Thursday, Ark Invest CEO and CIO Cathie Wood explained that she wouldn’t be surprised to see a significant Fed pivot in the coming months.

“You’ve got Europe in recession, China in recession, effectively, and here in the United States, retailers are bulging with inventories which will have to be cleared with discounts,” Wood told FOX Business’ Maria Bartiromo on Friday. “So we think we’re going to see some major downside surprises in inflation during the next three to six months.”

On “Mornings with Maria,” Wood explained how deflating commodity prices and an ongoing “inventory recession” impacts the macroeconomic landscape and the Fed’s next rate decision.

“If you look at commodity prices, the gold price, for example, it actually peaked in August of 2020, and it’s at the lower end of a two-year range, while copper has broken down, oil is breaking down, lumber has crashed, iron ore as well,” Wood explained. “Freight rates out there are suggesting that the supply chains are loosening up quite significantly. The rates are coming down. So we’ve got deflation in the system.”

BILLIONAIRE DAVID RUBENSTEIN WARNS INFLATION WILL BE DIFFICULT FOR THE FED TO REDUCE

Powell using a similar “gold exchange standard sledgehammer” as former Chair Paul Volcker in the 1908s to tackle inflation, Wood argued, is a mistake.

“That is what I believe Chairman Powell thinks he needs. And we just don’t think that’s true because we see so much deflation,” Wood said.

Cathie Wood sits on stage

Cathie Wood, chief executive officer and chief investment officer, Ark Invest, says the U.S. is facing an “inventory recession” on “Mornings with Maria” Friday, September 9, 2022. (Getty Images)

Pointing out that the Fed’s favorite inflation gauge hit its 5.3% peak in February, Wood expected PCE to see more negative numbers for the remainder of the year.

“I wouldn’t be surprised to see it well down into the threes in the next 3 to 6 months, if not into that two [percent] handle,” Wood said. “And I think if we get enough sequential declines, then the Fed will change its tune quite dramatically.”

Federal Reserve Jerome Powell in a suit w

Federal Reserve Chairman Jerome Powell speaks to the Senate Banking, Housing and Urban Affairs Committee, as he presents the Monetary Policy Report to the committee on Capitol Hill, Wednesday, June 22, 2022, in Washington. (AP Photo/Manuel Balce Ceneta / AP Newsroom)

“I think they’ll change their tune and perhaps they will take interest rates up 75 basis points this time,” she continued, “but the next time, 25 to 50 basis points. And then following that, we shall see.”

Noting that Europe faces an energy crisis and China readjusting to “common prosperity,” Wood also predicted GDP profits could feel “tremendous pressure” until costs decline and inventories are cleared.

Federal Reserve Chairman Jerome Powell

Federal Reserve Chairman Jerome Powell speaks during a news conference at the Federal Reserve Board building in Washington, Wednesday, July 27, 2022.  (AP Photo/Manuel Balce Ceneta / AP Images)

“We do not think this will be anything like ’08 or ’09, which I know many people fear,” the CEO said. “We think it’s much more of an inventory recession and a drag from the rest of the world.”

Reacting to former Treasury Secretary Larry Summer’s concerns that U.S. unemployment could soar to 6% this year, Wood agreed that there’s been some “labor hoarding” in the market, and that an inventory recession causes a “sharp” rise in unemployment.

“The employment numbers have looked strong. If you peel the onion a bit, the underbelly of employment is not strong with household employment essentially flat over the last 4 to 5 months, which includes a lot of small businesses. That’s where we see a lot of the pain right now,” Wood said.

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After launching the Ark Innovation ETF in 2014 and watching its value slump down nearly 60% this year alone, the star stock picker also responded to the company’s most recent upset in the market.

“We are in very early days, and that’s why we encourage our investors as well to get on the right side of change,” Wood said. “It’s been awfully painful and believe me, I do feel it and we’re completely committed. We actually increased our own ownership of our firm in the middle of all of this. That’s how high our conviction is, and almost every employee participated in that.”

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