Wharton business school professor Jeremy Siegel said Friday that the U.S. Federal Reserve does 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’s “Squawk Box Asia.” “The market thinks it’s going to be a little more — 125, 130 basis points more. My feeling is we won’t need that much because of what I see as a slowdown.”
“If you want to do it all at once, or you want to do it over a period of two to three meetings — it won’t make that much of a difference,” he said. “The question is what terminal rate do we have to go to.”
The Fed raised its benchmark rate by 0.75 percentage point in both June and July — the largest back-to-back increases since the central bank started using the funds rate as its chief monetary policy tool in the early 1990s.
Traders are betting the Fed will raise rates again at its next meeting in September and then again in November and December before cutting rates in the spring, depending on the evolving economic conditions.
Siegel added housing costs, which are a significant factor of core inflation, said that housing have recently “gone down by a record amount exceeding any six-month period.”
“The actual on-the-ground in the United States, is that real estate prices are actually beginning to go down,” Siegel said.
What to look out for
Siegel said investors will want to hear more details on what the Fed plans to do about inflation at Fed Chairman Jerome Powell’s speech at Jackson Hole later Friday.
Powell is slated to speak at the annual symposium, where he’s likely to emphasize that the central bank will use all the fire power it needs, in the form of interest rate hikes, to snuff out inflation. Watchers say he is also likely to point out that after the Fed finishes raising rates, it is likely to hold them there, contrary to market expectations that it will actually start to cut interest rates next year.
Siegel said markets would prefer if Powell signals that the Fed would be watching upcoming consumer price index data, instead of “backward looking data.”
“I don’t want Powell to be overly aggressive by just looking at visual statistics of the Consumer Price Index,” said Siegel. “If we look at the difference between the inflation protected bonds or the nominal bonds, they are down from their highs,” he said, adding that inflationary pressures seem to have stabilized.
Inflation-linked bonds have soared in popularity this year, as investors look for yield to combat rising prices.
“I hope [Powell] recognizes that the amount of tightening that we’ve put in, and are expected to put in between now and year-end — at least 100 basis points — is very much slowing the economy,” Siegel added.
Fed officials were “noncommittal” about the size of the interest rate hikes for the upcoming Federal Open Market Committee meeting — scheduled to take place Sept. 20-21 —according to a Reuters report. A poll predicted a 50 basis point hike at the meeting.
Siegel said U.S. money supply growth is evidence of an economic slump, describing it as “one of the sharpest slowdowns in history.”
Other key data, such as the August nonfarm payrolls slated to be released next week, is something Siegel said he will be closely watching. Latest data showed hiring in July surged, topping estimates and defying fears of a recession.
Siegel added that he’s “disturbed” there isn’t much discussion over what he called a “productivity collapse,” calling it the biggest puzzle that the Fed needs to address in upcoming meetings.
“We’ve added 3.2 million workers, yet we’ve had declining GDP like we have never seen before,” he said. “This is a productivity collapse of unheard in proportions, and it’s very significant.”
“What are they doing? How many hours?” he said. “Are we misreporting? Are people that are working from home not really working from home?”