The stock market hit a bottom in June but it will drop again if the Fed hikes rates to 4% or beyond, says Wharton Professor Jeremy Siegel

• US stocks bottomed in June but the market could drop again if the Fed remains overly aggressive, Jeremy Siegel said Tuesday.
• The fed funds rate is already above a neutral level at a range of 2.25%- 2.5%, he said.

The second half of 2022 looks favorable for the US stock market but it will drop through the lows set in June if the Federal Reserve decides to raise interest rates to 4% or higher, Wharton professor Jeremy Siegel told CNBC on Tuesday.

"We'll have maybe 100 basis points left … perhaps 50-25-25," in terms of rate-hike sizing by the Fed in its ongoing effort to bring down high inflation, Siegel said in an interview. The Fed has raised the fed funds rate four times this year, bringing it to a range of 2.25% to 2.5%. The Fed has policy meetings in September, November, and December.

"We need some raising. I'm not saying, 'Stop now.' But if they take a very aggressive 75-50-50 movement up to four, four and a half, five percent, I think they're gonna they're going to be sorry that they've been so tight."

Wages in certain sectors of the economy are moving higher but "on the ground" housing prices - a major inflationary force in the last two years - are dropping and forward-looking, sensitive commodity prices are not going up, he said.

"And I think if the Fed takes a look at that, they will not have to go more aggressively. So I think the market has it right here. I think June is going to be a bottom and I think the second half of the year is going to be quite good," he said.

The S&P 500 last week marked a fourth consecutive week of gains and as of Monday cut down its year-to-date loss to roughly 9.8%. The index rebounded from its bear market in part on the view that the Fed will pivot away from rate hikes and enact rate cuts next year as inflation cools and as economic activity potentially contracts.

The world's largest economy could find a "soft landing" if the central bank loosens its grip on money supply, which Siegel said has experienced "the biggest slowdown we have ever seen."

A soft landing is "not a sure thing. But I'm becoming more optimistic about that," said Siegel, whose books include "Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies."

Siegel said the US is already above a neutral interest rate - or a level at which the fed funds rate is neither feeding nor choking off economic activity.

"If we go to five percent, we're going to absolutely have a very inverted [yield] curve and definitely guarantee a recession," he said. "So they have to be cognizant that their two and a half percent -- which is our long-term Fed funds rate under a two percent inflation forward scenario -- is really too high. It should really be about one and a half percent."

Headline inflation was 8.5% in July, cooling down from June's 9.1% rate that marked a 41-year high. Gross domestic product contracted 0.2% in the second quarter after economic activity shrank 1.6% in the first quarter of 2022.