Jeremy Siegel: Year-End Stock Rally Possible

Cooling inflation could set the stage for a year-end stock market rally and signals that the Federal Reserve should stop raising interest rates, Wharton School economist Jeremy Siegel said Thursday as new consumer price data sparked a major surge in equities.

Siegel, a guest on CNBC’s “Halftime Report,”  said the Fed probably will raise the benchmark interest rate another 50 basis points next month and then pause, although the central bank doesn’t need to hike interest any further now.

“Inflation is basically over,” Siegel said, adding that core inflation would be lower if the Fed relied on the actual home and rental price index rather than lagging data calculated into the Consumer Price Index.

The CPI climbed a seasonally adjusted 0.4% in October and 7.7% from a year earlier before seasonal adjustments, moderating more than expected; the index rose 8.2% year over year in September.

“This is what we’ve been talking about for the last three months, that inflation is much lower than the Fed thinks,” Siegel said. The emeritus professor has sharply criticized the Fed for being late in responding to rising inflation last year and then aggressively raising interest rates this year to tame rising prices, based on lagging data.

“We’re in negative inflation mode if the Fed uses the right statistics, not the faulty statistics that they’ve been using,” he said on CNBC.

“You say when should they pivot? Yesterday. Yeah, they’ll probably go [up] now 50 [basis points] and stop. They don’t really need to even do that because everything’s in the down mode,” he said.

“If the trends continue I would stick with where we are. Now I don’t think they will. They’re going to go to 50 and announce a pause. … And that’s why we have a thousand-point rally today,” Siegel explained.

“This does make for a good year-end rally,” the economist said mid-day Thursday; the Dow Jones ended the up 1,201 points at 33,715.

Another month of economic data will be posted before the Fed’s policy meeting next month, including the CPI figures for November coming out about the same time, Siegel noted, adding that more encouraging statistics could result in a 25 basis-point rate hike.

Siegel said he was shocked by Fed Chairman Jerome Powell’s hawkish comments at a news conference last week. “He’s going to change his tune when they get to the real-world data in their December meeting,” Siegel said.