Cathie Wood, Founder, CEO, and CIO of ARK Invest, speaks at the 2022 Milken Institute Global Conference in Beverly Hills, California, May 2, 2022.David Swanson | ReutersThe Federal Reserve likely is making a mistake in its hardline stance against inflation Ark Investment Management’s Cathie Wood said Monday in an open letter to the central bank.Instead of looking at employment and price indexes from previous months, Wood said the Fed should be taking lessons from commodity prices that indicate the biggest economic risk going forward is deflation, not inflation.”The Fed seems focused on two variables that, in our view, are lagging indicators –– downstream inflation and employment ––both of which have been sending conflicting signals and should be calling into question the Fed’s unanimous call for higher interest rates,” Wood said in the letter posted on the firm’s site.Specifically, the consumer price and personal consumption expenditures price indexes both showed inflation running high. Headline CPI rose 0.1% in August and was up 8.3% year over year, while headline PCE accelerated 0.3% and 6.2% respectively. Both readings were even higher excluding food and energy, which saw large price drops over the summer.On employment, payroll growth has decelerated but remains strong, with job gains totaling 263,000 in September as the unemployment rate fell to 3.5%.But Wood, whose firm manages some $14.4 billion in client money across a family of active ETFs, said falling prices for items such as lumber, copper and housing are telling a different story.Worries over a ‘deflationary bust’The Fed has approved three consecutive interest rate increases of 0.75 percentage point, mostly by unanimous vote, and is expected to OK a fourth when it meets again Nov. 1-2.”Unanimous? Really?” Wood wrote. “Could it be that the unprecedented 13-fold increase in interest rates during the last six months––likely 16-fold come November 2––has shocked not just the US but the world and raised the risks of a deflationary bust?”Inflation is bad for the economy because it raises the cost of living and depresses consumer spending; deflation is a converse risk that reflects tumbling demand and is associated with steep economic downturns.To be sure, the Fed is hardly alone in raising rates.Nearly 40 central banks around the world approved increases during September, and the markets have largely expected all the Fed’s moves.However, criticism has emerged recently that the Fed could be going too far and is at risk of pulling the economy into an unnecessary recession.”Without question, food and energy prices are important, but we do not believe that the Fed should be fighting and exacerbating the global pain associated with a supply shock to agriculture and energy commodities caused by Russia’s invasion of Ukraine,” Wood wrote.The Fed is expected to follow the November hike with another 0.5 percentage point move in December, then another 0.25 percentage point move early in 2023.One area of the market known as overnight indexed swaps is pricing two rate cuts by the end of 2023, according to Morgan Stanley.