Ark Invest’s Cathie Wood called out the Federal Reserve again Wednesday, saying the central bank is making a policy mistake by aggressive rate hikes as deflation looms. The innovation investor pointed to the so-called yield-curve inversion. The yield curve inverts when shorter-term Treasury rates rise above longer-term yields. Many economists view the 2-year 10-year part of the yield curve as more predictive of a potential recession. “The bond market seems to be signaling that the Fed is making a serious mistake. At -80 basis points (as measured by the 10 year vs 2 year Treasury yields), the yield curve is more inverted now than at any time since the early ’80s when double-digit inflation was entrenched,” Wood said in a tweet Wednesday morning. The gap between the 2-year and 10-year Treasury yields has grown to 80 basis points. The short end of the curve soared to 4.33% from just 0.73% at the beginning of the year as traders priced in jumbo Fed rate hikes. The Fed has raised its short-term borrowing rate to a target range of 3.75%-4%, the highest level since January 2008. “Typically, an inverted yield curve is pointing to a recession and/or lower than expected inflation than expected,” Wood said. “In our view, deflation is a much bigger risk than inflation. Commodity prices and massive retail discounts are corroborating this point of view.” Wood previously criticized the central bank for basing monetary policy decisions on lagging indicators: employment and core inflation, while a number of leading indicators are signaling inflation may have already peaked. Ark Invest’s CEO said it’s surprising the energy sector is still trading near its record high even as oil price has dropped significantly from its peak. U.S. crude last traded at $74.37, down from its record high of $130 per barrel. “Meanwhile, many pure play, early stage innovation stocks have dropped below their coronavirus lows. Truth will win out,” Wood said. Wood’s disruptive technology darlings have been among the biggest losers this year in the face of rising rates. Her flagship active fund Ark Innovation ETF (ARKK) is off 63% year to date.
