Wharton professor Jeremy Siegel says that most inflation data is below expectations and that the Fed’s hawkish expectations are at odds with economic reality.
Jeremy Siegel said inflation is improving and the Fed’s hawkish view is at odds with the economy.
He noted that 26 of the 27 inflation indicators were below expectations last month.
It may mean that the Fed will not have to raise interest rates as many observers expect.
Federal Reserve Chairman Jerome Powell stressed at Jackson Hole that the central bank won’t cut interest rates anytime soon, and that continued policy tightening is needed to bring down inflation — but that runs counter to what the data shows, according to Wharton professor Jeremy Siegel. He said in an interview with CNBC this week.
Of the 27 inflation indicators recorded over the past month, 26 were lower than expected, Siegel said. Most recently, the Institute for Supply Management’s price index hit 60% in July, down 18.5 points from 78.5% in June. This is the fourth largest decline recorded by the index, and the largest decline in manufacturing since the Great Recession.
He added that CPI usually lags behind real price declines and that property prices may fall as well, although that won’t be recorded for some time either.
“The inflation news is already on the ground, and it’s really coming in really well, which is why I was shocked when Powell was acting last Friday as if things were getting worse and worse and worse,” Siegel said in an interview with CNBC on Wednesday.
Although Siegel warned that the economy had an inflation problem early in 2020, he has been vocal in recent months about the Fed’s need to slow interest rate hikes, as central bankers risk over-tapping the economy. At the FOMC meeting in September last year, half of the FOMC members said there was no need to raise rates until 2022, and the most hawkish prediction was a 50-point rate hike, Siegel noted. The Fed has raised the effective federal funds rate by 150 points this year so far.
“So do they really have the ability to see the future? Not really…Everyone just said a year ago that I’m not even thinking about raising rates,” he said.
Siegel said central bankers will soon start slowing the pace of rate hikes as more inflation news data emerges, and the Fed only needs to raise another 100 basis points this year before pivoting. The current interest rate is 2.25%-2.5%.
“I don’t think they need to go any higher than that. And guiding the market by saying, ‘We’re going to stay high until 2023’ when they have no idea what’s going to happen in 2023. Good picture to show.”
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