Fed Rate Hikes ‘Playing With Fire’ on the Economy

  • According to Jeremy Siegel, the Federal Reserve is playing with fire in its management of the economy by raising interest rates by 75 basis points.
  • He still prefers equities over bonds despite the ongoing risks from the Fed’s aggressive rate hike policy.
  • “You’re going to get a bigger bang for your buck in the stock market,” Siegel said Thursday.

Wharton professor Jeremy Siegel is increasingly concerned about the Federal Reserve’s handling of the economy as it continues its tightening policy of rate hikes and balance sheet trimming.

“This is playing with fire for me in terms of what could happen to the economy,” he told CNBC in an interview Thursday.

Siegel’s concern stems from the rapidly declining money supply and its impact on liquidity in markets around the world, combined with overly aggressive rate hikes based on the Fed’s over-focus on lagging indicators of inflation.

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Markets are now pricing in the likelihood of the fed funds rate hitting 5% by May next year.

This level “is far too high in this world as inflation falls. Don’t specify year by year. Look forward to the real prices,” said Siegel. “I think you really get 2% [or] 3% forward looking real inflation. Rising up [to] 5% in today’s world, it’s too narrow.”

Instead of raising rates by another 75 basis points at its upcoming FOMC meetings in November and December, as the market now fully expects, the Fed would be better off raising rates by just 50 basis points in November and then pausing , according to Siegel.

“I can understand another 50 basis points, but then wait,” he said. And if the Fed does, the economy could look a lot better than some are expecting in the coming months.

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“If they can stop now or just [do] a little bounce and then wait and see, I think we have a chance of avoiding a recession,” argued Siegel.

Much of Siegel’s argument relies on the fact that inflation data on the ground shows a slowdown from recent highs, while the data the Fed is focusing on is lagging significantly.

“She [Fed officials] think services inflation will keep rising, but that’s because of the way the Bureau of Labor Statistics calculates this housing data. It’s skewing it up now, just like they skewed it down,” he said.

Regardless of what the Fed does in November, investors’ attention has turned to the third-quarter earnings season, and the results are coming in better than most expected. Siegel is not surprised, because the companies were able to benefit from both the years of low interest rates and today’s inflationary environment.

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“At the moment, [companies] are kind of best at keeping debt low, raising prices and using gains on the wages front,” he said, adding that most corporate debt is locked in at 2% or 3% for many years. Interest charges.

And that gives equities upside potential over the long term, according to Siegel, who still favors the asset class over bonds despite the recent rise in interest rates.

“Why would I hold something that is 4%? [interest rate] before inflation, that’s not the highest return. I think that’s one reason [bond] prices are falling and yields are rising… I would buy stocks versus these fixed income securities. I think they will both go up. I think yields will go down. But you’ll get more bang for your buck in the stock market,” he concluded.


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