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Jeremy Siegel: Stocks Will Rally After a Rate Hike

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An interest rate increase by the Federal Reserve could create a stock market rally, Jeremy Siegel predicts.

“I think we could have a stock market rally even though so many people are really fearing doom and gloom with the rate increase,” the professor of finance at the Wharton School told CNBC on Tuesday.

With the Fed’s highly anticipated decisions mere days away, Siegel seemed pretty confident of a rate hike.

The Fed’s two-day September meeting begins Wednesday, and the policy statement on rates and economic projections will be released at 2 p.m. Thursday. A rate increase would be the first in almost 10 years.

“They should move on Thursday, and I think they’re going to” Siegel told CNBC. “It’s going to be a close call. It’s going to be exciting at 2 o’clock.”

Siegel said it’s important to remember that the announcement will be a statement about the “intentions of further increases or not.”

“Remember Janet Yellen used the term ‘we can be patient’ and then she later described that as at least two meetings,” Siegel said. “She could say we are raising rates and ‘we can be patient’ in raising them again as we assess the economic and market impact of those rates.”

Siegel said that “even more importantly” the statement includes a new dot plot.

“Remember, the dot plot is the projections of the FOMC of what future rates are going to be, and I think that’s going to be very important because I think they’re going to come down dramatically for 2016,” Siegel told CNBC. “And, so, even if we get a 25-basis-point increase with dovish language and a lower dot plot, I think we could have a stock market rally.”

According to Siegel, the guessing game everyone is playing of “Will they or won’t they raise rates?” is more detrimental right now than an actual rate increase.

“It certainly adds to uncertainty, which is not good for any of the markets nor the economy,” he told CNBC. Also saying, “Let’s get [a rate increase] out of the way. I think uncertainty is hurting stocks more than an actual rate increase. And I’m in favor of a rate increase.”

While the CME FedWatch tool puts the probability of a rate hike this week at 25%, Siegel predicts there’s a greater than 50-50 chance that the Fed will raise rates.

“All those probabilities that we’ve been listening to about what the futures market says the Fed is going to increase and they’re saying 28%-30% — those are predicated on the assumption that the Fed will immediately move to the midpoint of the new range of the fed funds, which of course is expected to be 25 to 50 basis points,” he said. “They may not. There’s some indication that they may stay at the low end of the fed funds.”

Rather than move to 37 basis points – which is the midpoint of the next range – Siegel thinks they’ll start at 12 basis points – which is about the midpoint now – and move to 25 basis points at the low end of the funds rate.

“I think this assumption that they’re immediately going to move it to 37 … is not necessarily warranted, and I don’t think the assumption that ‘Oh the traders have not built anything like a rate increase in’ is also an unwarranted assumption,” Siegel told CNBC. Adding, “I think the market is more prepared for this increase than many, many traders believe it is.”

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