Wharton professor Jeremy Siegel says the US economy is faltering - and the Fed may cut interest rates to 2% next year
- Jeremy Siegel says the US inflation threat is receding and the economy is weakening.
- The Wharton professor expects US labor and housing markets to soften in the months ahead.
Jeremy Siegel has warned the Federal Reserve needs to realize inflation is cooling and the US economy is faltering, or it risks causing an unnecessary recession and tanking corporate earnings.
The Wharton finance professor, in his weekly commentary for WisdomTree on Monday, rejected Jim Bullard's suggestion that interest rates may need to reach 7% to beat back inflation. Siegel said he had no idea what data the St. Louis Fed chief has been looking at.
In response to inflation surging to a 40-year high this year, the Fed has hiked rates from near zero in March to a range of 3.75% to 4% today, in a bid to cool demand and slow the rate of price increases. The US central bank has signaled rates could peak above 5%, as it continues to see inflation as a serious threat.
However, Siegel flagged evidence of dwindling inflation and a weakening US economy in his commentary. He pointed to recent data for producer prices, retail sales, employment, and home sales.
"There's economic softness — just not in the labor markets yet," he said. "It probably will take serious declines in the labor markets to convince the Fed to pause/reverse their tightening, but I think that slowdown is coming."
On top of reduced hiring and possibly higher unemployment, Siegel expects the housing market to weaken as higher interest rates lead to more expensive mortgages.
"We will surely see more pressure on housing prices, given the surge in mortgage rates," he said.
The author of "Stocks for the Long Run" predicted the Fed will eventually wake up to the economic reality, and shift from hiking rates to cutting them.
"I would not be surprised to see a 2% Fed funds rate by the end of 2023," he said, adding that an economic slowdown remained likely.
Siegel emphasized that the longer the Fed delays its pivot, the deeper the recession and earnings decline will be next year. Yet he still hasn't given up hope of the US economy staying afloat, he noted.
"There is still a small chance we can avoid a recession, if the Fed recognizes the inflationary impulse and pressures are over and eases off the brakes," he said.
Siegel has been urging the Fed to end its inflation fight for a while, as he believes the threat is "basically over." He's also predicted stocks will surge by 20% to 30% over the next two years, while elevated rates will cause a historic collapse of the housing market.