In an open letter to the US central bank, Ark Invest CEO Catherine Wood questions the decisions made by the financial institution in charge of monetary policy. In an open letter to the US central bank, Ark Invest CEO Catherine Wood questions the decisions taken by the financial institution in charge of monetary policy. With rising commodity prices and falling household purchasing power, the businesswoman offers an informed argument on the current economic situation.
Monetary policy not adapted to market conditions
The US Federal Reserve has raised interest rates three times this year to combat inflation, from nearly 8.3% in August to another rate hike in early November.
Several economists and influential figures in the financial world agree that the direction of the Fed’s policy will have far greater negative effects than inflation itself.
In a letter published on Ark Invest’s website, Cathie Wood highlights several inconsistencies in the policy presented by the FED, notably concerning the data used by the institution.
As a reminder, Ark Invest is an investment fund specialised in the management of ETFs or trackers that replicate the performance of several innovative industries such as the crypto-assets market, but also the robotics market or 3D printing.
Wood said that inflation figures represented by different indicators such as the Consumer Price Index (CPI) or the Personal Consumer Expenditure Price Index (PCE) do not provide a good measure of consumer price inflation.
While the latter take into account changes in energy or food prices, the rise in commodity costs is excluded.
Commodity prices are key indicators to consider. […] Of course energy and food prices are important factors. However, the FED’s monetary policy should not, in our view, exacerbate the difficulties associated with the energy and agricultural price shock caused by Russia’s invasion of Ukraine. “
The letter is accompanied by a summary table of commodity price changes. While wheat has risen by almost a third (+28%) over a year, the price of a barrel of oil peaked at $135 on 29 April 2022 and has fallen by 16% since then.
Large company stocks: key factors to consider
Cathie Wood continues her argument by pointing out some interesting data on the inventory crisis of some leading US companies:
“While Walmart and Target’s sales growth was only 10% in the last quarter, their inventories rose by 25.5% and 36.1% respectively. Nike’s inventory-to-sales ratio is deteriorating. According to its latest quarterly results, Nike’s global sales increased by only 3.6% while its inventory increased by 44.2%. If we focus only on North America and products in the process of being shipped, stocks have increased by 64.8 and 85% respectively in the third quarter of 2022! “
Ultimately, according to Cathie Wood, if aggregate demand has weakened as a result of the FED’s actions to curb inflation, wouldn’t the risks of an economic recession or even deflation be key contingencies for the US Federal Reserve to consider?
As the data from Walmart or Target show, companies are stockpiling products as demand slows.
More generally, if a rise in key interest rates reduces the ability of companies to finance their operations and indirectly the purchasing power of households, should the US central bank not take into account factors additional to the change in CPI and the unemployment rate?
According to Cathie Wood’s argument, the state of health of its major companies or the impact of changes in commodity prices on the US economy should also be considered before raising key interest rates. To be continued
