The Fed is ‘changing their tone,’ Cathie Wood says

ARK Invest Founder and CEO Cathie Wood joins Yahoo Finance Live to discuss Fed Chair Powell’s remarks at Wednesday’s FOMC meeting, inflation, the state of the economy, how AI is transforming industries, investor sentiment, and the outlook for Big Tech.

Video transcript

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JULIE HYMAN: Yeah, let's expand on today's top story, the Federal Reserve raising rates yesterday and giving clear signals that there's at least one more hike in store. But while investors are taking heart in that less hawkish Fed, some investors think the Fed is not pulling back far enough or fast enough.

Joining us with more is Cathie Wood, Ark Invest founder and CEO. Cathie, great to see you here this morning. This is something you've been talking about for a while, right, that you thought we would actually see not just disinflation, but some deflationary pressures in the market and that the Fed should slow down. What did you think of what we heard from Jay Powell yesterday?

CATHIE WOOD: Yes. Hi, Julie. Yes, I think the most important thing he said was that he agreed with Lael Brainard, who's saying we are not in the middle of a wage-price spiral. And that's code word, I think, for saying we are not in a '70s style inflation, which was the biggest risk that he was pointing to.

And I would also say that Larry Summers, who seemed to be apoplectic earlier-- or last year, mid-last year, I would say, saying this is a '70s style inflation and you've got to take interest rates up to 6% or 7% or higher on the Fed funds rate, he has changed his tune. He was saying, whoa, whoa, whoa, whoa. Maybe you shouldn't indicate anything about where interest rates are going. So big change in tune there.

And I think also a big change in tune from Treasury Secretary Janet Yellen as well, who I think last week said something like I think once we're through this inflation-- and it seems like she wasn't using the word transitory again but it sounded like it, she's saying when we get through this, we're probably going to be grappling with a very low inflation, slow growth environment.

So big changes in tunes from the advisors to the Fed. And-- and yet they voted unanimously to increase 25 basis points. And when I wrote my open letter to the Fed, it was really about that. You can't be unanimous in this call. There are too many conflicting indicators. But they are. Nonetheless, they are changing their tone.

BRAD SMITH: So with the absence of Fed Chair Jay Powell-- and this is Brad, by the way. With the absence of Fed Chair Jay Powell saying anything during the month of January and the meeting really kicking off at the tail end and, of course, the announcement to begin February, during the month of January, ARKK, your fund in the holdings, it had a great move to the upside. It was up by about 37%.

And so within that and that January performance, do you believe that this is kind of the making of a bear market rally that we had seen during January? Or do you believe that with the comments from the Fed that there's actually more steam ahead, more full steam ahead for some of those more risky assets out there?

CATHIE WOOD: Yes, Brad, well, I-- I'm struck that the market is now leading the Fed. And when I say the market, I'm really talking about the bond market. So the bond-- 10-year bond yield peaked in October at about 4.30%, 4.3% and is now down this morning, I think, to 3.35%, so huge rally in bonds. And effectively, the bond market is saying we don't have an inflation problem, and the Fed is probably close to the end of this move.

Last year, we did have, as you call them, bear market rallies, and they were pretty powerful a few times during the year. And then after those bear market rallies, we had Fed Chairman Powell come out and really slam expectations by saying we are going up 75 basis points at a time, we don't have inflation under control, and really putting the markets, all kinds of markets, into a panic.

We had the long bond last year, the bond market delivered its worst return, I believe, certainly through, I think it was October, the worst return since the 1700s. You have to go back that far. And therefore, that-- the risk of higher interest rates was killing long-duration assets.

And of course, innovation is very long duration. So I think something's changed. I think their tune has changed. I think they're less worried about inflation, most importantly, less worried about a wage-price spiral, which defined the '70s inflation.

BRIAN SOZZI: Cathie, Brian here. Always good to get some time with you. Do you think the Fed has to start cutting rates perhaps sooner than it believes?

CATHIE WOOD: I think the bond market is suggesting that that is so. Yes. And we've seen the deflation in the pipeline, as Julie mentioned. It started with commodities. And then during the holidays, we saw massive discounts. We've seen used car prices, I think they're down 14% year-over-year, having peaked at up 55% year-over-year.

So some of the leading indicators that caused this-- the spike in inflation-- and we think it was primarily supply or shock-induced-- some of those are unwinding. And we think they're going to continue to unwind faster than most people think. I think the one little wrinkle here is we're seeing a backup in gold prices, copper prices in anticipation of China coming back and driving up these prices. We don't think that's going to be the case, particularly with oil prices because we believe that China's been building inventories during this time period, especially in oil since it's been getting oil for a 40% discount from Russia.

JULIE HYMAN: Cathie, with regards to all of this, I'm curious about-- because we know you're all-in on innovation all the time and you have a new-- newish venture fund to that effect. At times like this, we do hear that there is less investment in things like innovation, right, in private markets, to some extent. There's at least concern that there's going to be less investment in those areas with all of the cutbacks we're seeing in public companies. What are you seeing on the ground and with the venture work that you're doing?

CATHIE WOOD: Well, we-- the leading indicator for what we're seeing in the private markets was what happened in the public markets in the last two years. Innovation was pummeled, especially the companies that won't be highly profitable for, let's say, five years. They were hit especially hard. And of course, in the private market, that's primarily what we have. The private market lagged the public market.

And now we're seeing stabilization in the public markets. I think the idea that interest rates may be near their peaks, certainly long-term rates seem to have peaked, will be very reassuring to both the public and the private markets. So I think if you look at our Big Ideas report-- we just published it two days ago, Big Ideas. It's on ARK.invest.com-- you will see innovation opportunities the likes of which we have never seen before.

We believe that innovation is priced in the public equity market-- or, no, in the markets, both public and private, at roughly $13 trillion. So that's-- roughly, I'm going to say it's 10% of the total market values out there. And we believe that $13 trillion is going to scale at a 40% annualized rate over the next eight years to $200 trillion by 2030.

Now, the driver of this powerful move is primarily artificial intelligence. It is catalyzing all kinds of changes in all kinds of industries. And I don't think that investors have done enough research on how profound this impact is going to be. One of the reasons we give our research away is we want to help investors, but not only investors.

We want to help parents and grandparents guide their children and grandchildren to the right side of change. We want investors to get to the right side of change. And we've been saying for quite some time that the right side of change is more in the innovation space, clearly given how much is taking place, than it is in the benchmarks.

We believe that the innovation we're seeing today around multiomics sequencing, robotics, energy storage, artificial intelligence, and blockchain technology is going to disrupt the traditional world order. And if we're right on what's going to happen here, then the traditional benchmarks, the broad-based benchmarks, are probably not going to be a very productive place to invest, certainly relative to innovation during the next 5 to 10 years.

JULIE HYMAN: Cathie, we're going to hit pause on this for just a moment because I'm glad you brought up AI because one of our reporters has been digging into the public market action that we have been seeing. So just stay around, and we're going to pick up this AI discussion in a moment.