- The Federal Reserve is closer to ending its series of rate hikes, Wharton professor Jeremy Siegel told CNBC on Monday.
- Market investors want the Fed to consider that forward-looking inflation has cooled considerably, the economist said.
- He said a rebound in collapsed productivity should aid in pulling down inflation.
The Federal Reserve’s aggressive rate-hiking cycle should be wrapping soon, Wharton professor Jeremy Siegel told CNBC on Monday, saying there are signs of significant cooling within the hottest inflationary environment in 40 years.
“I think the Fed should be near the end of its tightening cycle. I think we’re already in a above-neutral mode. I know a lot of people think not … Well, I think the neutral rate is somewhere between one and one and a half [percent]. We’re over two [percent] right now,” said the professor of finance at the Wharton School during a segment about markets.
The Fed “has got to be looking at the sensitive commodities and housing prices and say, “You know, what? Yeah, we messed up later on and caused a lot of inflation, but forward-looking inflation has really been stopped.”
The Fed, led by Chairman Jerome Powell, last week issued a rate hike of 75 basis points. The fourth rate increase of 2022 has brought its benchmark interest rate up to a range of 2.25%-2.5%, aiming the moves toward widespread cooling of prices. The US consumer price index in June rose to 9.1%, the largest 12-month increase since November 1981.
Investors want the Fed to look at forward-looking inflation indicators in part as the consumer price index, or CPI, understates housing prices, Siegel said. “[All] the word from housing experts and the data says, ‘Hey, that housing inflation has come to an end,” he said.
New home prices will decline from peaks set during the “frenetic pace” of demand in 2020 and 2021, Moody’s said in a report published in June. It also said potential homebuyers will be sidelined by inflation and mortgage rates that nearly doubled over the past six months.
Siegel also said he’s “puzzled” by the drop in US gross domestic product with a collapse in productivity while the economy had added 2.7 million jobs in the first half of 2022.
In possibly good news, he said, “if we get a bounce back to a more normal level, that really slows down inflation because … higher productivity, less inflation.”
Investors will gauge the health of the labor market on Friday with the US July payrolls report. Econoday’s consensus estimate calls for the addition of 250,000 jobs and an unchanged 3.6% unemployment rate.
US GDP contracted by 0.9% in the second quarter of 2022, according to a preliminary reading from the Commerce Department last week. The report put the US on a course toward a technical recession as the economy shrank 1.6% in the first quarter.