Jeremy Siegel: Time for Fed to Slow Rate Hikes

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.” 

As for the market, “I’m not going to guarantee we saw the bottom a couple of months ago … but earnings have really held up,” the professor said. With more than half the S&P companies having reported, it’s “not as big a beat as last year, of course, but that was an all-time record.”

Guidance is a little bit lower “but I look at the S&P estimate for just this year, so I’m not talking about 2023, it’s not any different from January, really, even with all that’s happened.” 

Why the GDP Drop?

Siegel said he’s puzzled by the drop in GDP when the U.S. economy added 2.7 million jobs in the first half of this year.

“How did we get a drop in GDP? I don’t know why people aren’t asking that question,” he said. You get GDP by people working, so the logical explanation would be “a tremendous drop in hours. Well the official drop in hours doesn’t explain it. Or a dramatic drop in productivity,” he said.

The first quarter brought the worst productivity in 75 years. But it bounced back 75 years ago, Siegel noted. “Now the government is telling us with recent data that the second quarter … is almost as bad as the first quarter. This is unprecedented. We have never seen a collapse of productivity like that in history,” Siegel said. The possible good news is that a bounce-back to a more normal level would slow inflation, “because obviously less productivity equals more inflation, high productivity less inflation,” he said.

Siegel wondered how to understand the GDP drop while the economy added 2.7 million jobs. “You have to try to figure some of this data out before you make rash moves on the monetary front,” he said.