Elon Musk warns the Fed could send prices spiraling downward if it hikes interest rates too sharply this month

If the Fed raises interest rates too much, it could cause prices to go down.

A rate hike by the Fed could lead to deflation.

The Fed lifted its benchmark rate from near zero in March to between 2% and 2.5% today due to inflation. There is a chance of a third hike of 0.75 basis points later this month.

Higher interest rates help to reduce aggregate demand and cause upward pressure on prices. Slower economic growth and higher unemployment can be caused by excessive hikes in prices.

In March, Musk said that the cost of raw materials was going up for both companies.

Musk suggested in July that he could cut the prices of his cars if inflation slowed. He claimed that US inflation had peaked and that the economy would fall into a mild recession.

The deflation alarm has been sounded recently by other commentators. The CEO of Ark Invest has argued that technological advances will lower production costs and prices and that consumers will wait until that happens.

The investor of "The Big Short" fame who bet againstTesla and questioned Musk's stock sales last year has predicted that retailers will slash prices to get rid of excess inventory in the coming months, which will cause the Fed to reserve course.

Richard Thaler pointed out that Russia's invasion of Ukraine has led to higher food and fuel costs, while China's continued COVID-19 lockdowns have disrupted global supply chains. If the war ends and China ends its restrictions, that will relieve upward pressure on prices and possibly lead to deflation.

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