- Wharton professor Jeremy Siegel is not happy with the Fed’s hawkishness that was telegraphed at Wednesday’s FOMC meeting.
- Siegel said the Fed is contradicting itself as it focuses on crushing wages that are spiking due to supply side issues.
- Siegel ultimately expects that the Fed will be cutting interest rates in 2023, not raising them.
Wharton professor Jeremy Siegel called out the Federal Reserve’s hypocrisy towards combatting inflation as it telegraphed continued hawkishness at its December meeting on Wednesday.
Specifically, Siegel called out the fact that when inflation was rising after the COVID-19 pandemic due to supply-side issues, Fed chairman Jerome Powell insisted that inflation was transitory and did not act against it via interest rate hikes.
But now Powell is doing the exact opposite when it comes to structural supply-side issues that are plaguing the labor market.
“Now he’s saying there’s supply-side problems in the labor market that may raise wages, and we have to crush the wages in order to stop inflation. That’s just totally inconsistent as a part of monetary policy,” Siegel told CNBC on Thursday. “The Fed is not supposed to act on structural shifts on supply-side problems.”
Siegel said he was disappointed in Powell’s hawkishness telegraphed at Wednesday’s FOMC meeting, which included a 50-basis point interest rate hike.
“I was very disappointed in Powell in his reasoning and his justifications for this overly tight policy. He acknowledged that the housing data is lagged, that housing prices are actually going down, but we’re not going to see it until the middle of next year. So we’re going to wait until the middle of next year before we decide whether we need to pause the rate hikes, even though we know it today?” Siegel said.
“I think we need to get out of this year-over-year look at inflation. Remember, when we get year-over-year, we’re getting 11 months of old, outdated data, and only 1 month of new data, and in fact that 1 month contains data that [Powell] admits, particularly in the housing sector, is extremely lagged,” Siegel said.
The Fed’s backward looking views is ultimately setting them up for disaster once again, according to Siegel, who pointed out that in the Fed’s meeting last year, only two Fed members thought the Fed funds rate should be above 1% by the end of 2022. Today, the Fed fund’s rate is above 4%.
“I think they’re going to be exactly wrong in the opposite direction. They were way too loose before, funds rate had to rise a lot. And now they’re way too tight,” Siegel said.
This is exactly why Siegel expects the Fed to be cutting rates by the middle of 2023, rather than continuing to raise them.
“Maybe there’s [a] 25 basis point [hike] on the February 1 meeting. I don’t even think there should be that one. And maybe that’s the last one. You can be sure that next year they’re going to be talking about lowering rates,” Siegel said.
“I think the first rate cut might really take place closer to mid-year, and it might then be quite rapid as the labor market really does loosen up and inflation goes down. I actually venture that we might see a 2-handle on the Fed funds rate by next December. I think just like the surprise on the upside, we might be seeing a surprise on the downside,” Siegel said.