What You Need to Know
- The Fed should look at forward-looking data, as CPI is backward-looking and understates housing prices, the Wharton economist says.
- Siegel said he was puzzled by the drop in GDP amid major job growth.
- Corporate earnings have held up well this year, the professor says.
The Federal Reserve should end its tightening activity soon as forward-looking inflation appears to be under control, Jeremy Siegel, finance professor at the University of Pennsylvania’s Wharton School, suggested in a CNBC appearance Monday.
Fed officials need to look at more than the Consumer Price Index to gauge inflation, as the CPI is backward-looking and understates housing prices, Siegel told the cable network, adding that the market wants the central bank to look at forward-looking data.
CPI over the past year would have been up 10% to 12% if housing prices had been factored in properly; now, housing experts and data suggest that housing inflation has come to an end, he said.
“I think the Fed should be near the end of its tightening cycle. I think we’re already in (an) above-neutral mode. I know a lot of people think not … Well I think the neutral rate is somewhere between one, one-and-a-half, we’re over 2 (percent) right now,” Siegel said. (The Fed has described the neutral rate as a theoretical federal funds rate at which its monetary policy involves neither tightening nor easing.)
“I think the Fed has got to be looking at the sensitive commodities and housing prices and say[ing], ‘You know what? Yeah, we messed up later on and caused a lot of inflation but forward-looking inflation has really been stopped,’” Siegel said.
A lot of inflation that has been in the pipeline is coming through in the official statistics, “but forward-looking inflation I think is really nil on a real basis,” Siegel said. “And I think the Fed should really slow down the rate of hiking, and if we get a snapback in productivity that’ll put further downward pressure.”