Wharton Business School professor Jeremy Siegel said Friday that the U.S. central bank does not need to raise 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 bit more — 125, 130 basis points more. My sense is that we don’t need that much because of what I see as a slowdown.”[ads1];
“If you want to do it all at once, or you want to do it over a period of two to three meetings — it’s not going to make that much of a difference,” he said. “The question is which terminal price we must go to”.
The Fed raised its benchmark interest rate by 0.75 percentage points in both June and July – the biggest back-to-back increases since the central bank began using the funds rate as its main monetary policy tool in the early 1990s.
Traders are betting that the Fed will raise interest rates again at its next meeting in September and then again in November and December before cutting rates in the spring, depending on economic conditions.
Adding to housing costs, which are a significant factor in core inflation, Siegel said housing has recently “declined by a record amount exceeding a 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.
What to look for
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 scheduled 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 rate hikes, to stop inflation. Watchers say he is also likely to point out that after the Fed finishes raising rates, it will likely keep them there, contrary to market expectations that it will actually start cutting rates next year.
Siegel said markets would prefer if Powell signals that the Fed will look at upcoming CPI data, rather than “backward-looking data.”
“I don’t want Powell to be too aggressive in just looking at visual CPI statistics,” Siegel said. “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 appear to have stabilized.
Inflation-linked bonds have surged in popularity this year, as investors look for yield to combat rising prices.
“I hope [Powell] realize that the amount of austerity that we have put in, and are expected to put in between now and the turn of the year – at least 100 basis points – is slowing the economy down a lot, says Siegel.
Fed officials were “non-committal” on the size of rate hikes for the upcoming Federal Open Market Committee meeting – scheduled for 20-21. September – according to a Reuters report. A poll predicted a rise of 50 basis points at the meeting.
Siegel said the US money supply growth is evidence of an economic downturn, describing it as “one of the sharpest downturns in history.”
Other key data, such as the August payrolls scheduled to be released next week, are something Siegel said he will be watching closely. The latest data showed employment rose in July, topping estimates and defying fears of a recession.
Siegel added that he is “disturbed” and there is not much discussion about what he called a “productivity collapse,” calling it the biggest puzzle the Fed will have to address in upcoming meetings.
“We’ve added 3.2 million workers, but we’ve had declining GDP that we’ve never seen before,” he said. “This is a productivity collapse of unheard of proportions, and it is very significant.”
“What do they do? How many hours?” he said. “Are we reporting wrong? Are people who work from home not really working at home?”