Tesla CEO Elon Musk warns that increasing Federal Reserve interest rates could lead to a “crush” in the stock market. During Tesla’s 4Q earnings call, Musk expressed his concern that the Fed’s interest rate may soon exceed the average return of the S&P 500 if it rises above 6%. He emphasized that if the S&P 500 becomes less attractive compared to bank interest rates, the Fed would risk reducing the value of all equities.
In a tweet, Musk stated that with each rise in interest rates, the Fed increases monthly payments for anything bought with debt. After the COVID-19 outbreak, the Fed reduced interest rates to 0-0.25% but began hiking them in March 2022 and currently stands at 4.25%-4.50%.
Musk also recalls the Fed lowering interest rates after the 2007-09 Great Recession, which helped his electric vehicle company. In the past, he has warned that another interest rate hike could result in deflation in the economy.
The Federal Reserve faces a challenging decision with mixed signals from inflation and labor markets. Inflation, measured by Personal Consumption Expenditures Price Index, has decreased to 4.7% in the past year, down from its peak of 5.4% in Feb 2021. However, economists remain skeptical as a significant drop in inflation usually takes 2 years after a change in monetary policy.
Initial claims for unemployment insurance show surprising strength, while retail sales and single-family housing starts have declined. In addition, layoff announcements are becoming more frequent. These signals suggest that the Fed’s anti-inflation efforts are yet to be complete.
Some economists may predict another full percentage point increase in short-term interest rates, to be implemented gradually over the next few months, to tackle the inflation problem. Meanwhile, there are reasons to expect the eventual recession to be delayed, such as companies using equipment to substitute for workers, labor force adjustments starting with open positions, and unspent savings from the pandemic.
The Fed faces conflicting opinions and uncertainty, with data supporting both sides of the argument. The upcoming meeting will be a crucial one, as the Fed weighs the consequences of their decision on the economy.
