Jeremy Siegel: Fed Risks Depression If It Waits for 2% Inflation

Wharton School economist Jeremy Siegel warned that a hawkish Federal Reserve risks pushing the economy into a depression if it waits for core inflation to return to 2%, citing the lagging nature of both the central bank’s policy moves and the data — particularly housing stats — that help inform its decisions.

Siegel, appearing Thursday on CNBC’s “Halftime Report,” said the 0.4% monthly inflation reflected in the newly released September Consumer Price Index doesn’t vindicate the central bank on its aggressive moves to raise the benchmark interest rate to quell rising prices. The CPI indicates prices rose 8.2% over the past 12 months before seasonal adjustments.

Noting the “distorted way” the government handles housing statistics, Siegel called the reported 0.7% rise in prices for the sector “totally ridiculous,” explaining that the lagging figure calculated into the new CPI doesn’t reflect what’s really happening in the housing market.

The housing figure should be down, not up, 0.7%, “which by the way wipes out core inflation for September,” the professor added.

“It’s imperative that the Fed recognizes that that is not an indicator of what the real rate of inflation is,” Siegel said, explaining that the central bank started tightening only in March and it could take months or years for the results to appear in core inflation data.

“The Fed exploded the money supply” by a historic amount in 2020, but figures showing high inflation didn’t appear until the second half of 2021, he noted.

While the effects of the current tightening don’t appear yet in core inflation numbers, just like the effects of the earlier loosening didn’t emerge right away, Siegel said, “You see it in the housing market, you see it in the financial market, and you see it in the commodity market.” 

“All of those exploded in 2020, which showed you that inflation was definitely there and going to go into the official statistics,” he added. “And what has happened to those three markets? They’ve gone down. When will it get into the core? Months if not years down the line.” 

“If the Fed waits for the core to get down to 2% year over year, it’ll drive the economy into a depression,” Siegel said.

“I’m not at all surprised by the number because the number is ridiculous. It has no meaning into what the actual rate of inflation is in the housing, which is almost 50% of the core rate. It’s the most distorted of all.”