Jeremy Siegel, a professor at the Wharton Business School, said on Friday that the US Federal Reserve did not need to hike more than 100 basis points because an economic slowdown is in sight.
“I think we only need 100 basis points more,” Siegel said on CNBC.Squawk Box Asia“The market thinks it will be a bit more – 125, 130 basis points higher. My feeling is that we won’t need much because of what I consider to be a slowdown.”
“If you want to do it all at once, or if you want to do it over a period of two to three meetings, it’s not going to make much of a difference,” he said. “The question is what terminal fare should we go to.”
The Fed raised its key rate by 0.75 percentage points in both June and July — the largest consecutive increases since the central bank began using the key rate as its main monetary policy tool in the early 1990s.
Traders betting that the Fed will raise rates again at its next meeting in September, then again in November and December before lowering rates in the spring, depending on changing economic conditions.
Siegel added that housing costs, which are a big driver of underlying inflation, said housing had recently “decline by a record amount exceeding any six-month period”.
“The reality on the ground in the United States is that real estate prices are actually starting to come down,” Siegel said.
Siegel said investors will want to hear more details about what the Fed plans to do about inflation during Fed Chairman Jerome Powell’s speech in Jackson Hole later Friday.
Powell is due to speak at the annual symposium, where he is likely to emphasize that the central bank will use all the firepower it needs, in the form of interest rate hikes, to stifle inflation. Observers say it’s also likely to point out that after the Fed finishes raising rates, it’s likely to keep them there, contrary to market expectations that it will actually start cutting interest rates next week. next year.
Siegel said markets would prefer Powell to signal that the Fed would be watching upcoming consumer price index data, rather than “backcast data.”
“I don’t want Powell to be too aggressive just looking at the visual stats of the Consumer Price Index,” Siegel said. “If we look at the difference between inflation-protected bonds or nominal bonds, they’re down from their highs,” he said, adding that inflationary pressures appear to have stabilized.
Inflation-linked bonds are gaining popularity this year as investors seek yield to combat rising prices.
“I hope [Powell] recognizes that the degree of tightening we have put in place and are expected to put in place by the end of the year – at least 100 basis points – is significantly slowing the economy,” Siegel added.
Fed officials were “noncommittal” about the scale of interest rate hikes for the next meeting of the Federal Open Market Committee – scheduled for September 20-21 – according to a Reuters report. report. A poll predicted a 50 basis point hike at the meeting.
Siegel said the growth in the US money supply is evidence of an economic collapse, describing it as “one of the most pronounced downturns in history.”
Other key data, such as August nonfarm payrolls due out next week, is something Siegel said he will be watching closely. The latest data showed hiring in July jumped, beating estimates and defying fears of a recession.
Siegel added that he was “bothered” that there wasn’t a lot of talk about what he called a “productivity collapse,” calling it the biggest puzzle the Fed needs to solve when future meetings.
“We added 3.2 million workers, but we had a decline in GDP like we’ve never seen before,” he said. “This is a collapse in productivity of an unprecedented proportion, and it’s very significant.”
” What are they doing ? How many hours ? he said. “Are we making misrepresentations? Are people who work from home not really working from home?”