Wharton’s Jeremy Siegel calls for a 100 basis point rate hike and says markets could be “near bottom”.
A 100 basis point rate hike by the Federal Reserve on Wednesday will be “medicine to stop that inflation,” the Wharton professor of finance at the University of Pennsylvania told CNBC on Wednesday.
“The Fed needs to seize the inflation narrative…they know it was way too late,” Siegel said on “Squawk Box Asia.”
“[You] You have to take your medicine now to heal. If you give up, you will need to take more medicine later. »
As annual inflation hit a 40-year high of 8.6% in May, the likelihood of more aggressive rate hikes sent markets tumbling amid fears of a global recession.
US stocks fell into bearish territory earlier this week, sending ripples through global markets.
David Orrell | CNBC
Siegel said Fed Chairman Jerome Powell can justify such an aggressive move by bringing forward the 50 basis point hike expected for July and combining it with the 50 basis points expected for June.
Anything less than a perceived hard-hitting move by the Fed this week will signal to markets that it does not have inflation under control, Siegal said.
“Whether [Powell] only makes 50 [basis points], I think there will be a big disappointment. So [markets] going to say he’s not in control, he’s not going fast enough,” he said.
The markets will rally
If the Fed nips the inflation problem in the bud, a rally in markets will likely ensue as investors and companies price in higher rates and begin to scale back earnings forecasts.
Instead of panicking and pursuing more aggressive rate hikes after introducing this 100 basis point hike, the Fed should wait for it to trickle down to the economy, Siegel said. Too many aggressive moves could trigger a severe recession, he added.
As it stands, financial markets have already priced in a mild recession for 2023, he added.
“I think you’ll get a rally, and [while] it’s very difficult to pinpoint the exact lows in the market, I think we’re close to the bottom,” Siegel said, adding that the rally would break down within “hours” of the Fed’s announcement.
“And that would signal that we’re taking the drug to stop this inflation. If we take it sooner, we’ll be better off later and there’ll be less likelihood of a recession in 2023,” he said.
If the Fed moves strongly on Wednesday, inflation should fall by the end of the year and if commodity prices start following stock markets into bearish territory, then the US economy is well on its way to bringing the US economy under control. inflation, Siegel told CNBC.
But with the US economy pumped with stimulus — and if the Fed acts cautiously — a major recession can easily be avoided, the professor said.
“There is still too much cash, too low unemployment, too much demand,” he said.
“An unprecedented flurry of money”
Excess liquidity and rising demand, driven mainly by government stimulus measures following the pandemic, were responsible for the price increase, although supply chain constraints also played a role. a role, Siegel added.
“We have [an] unprecedented flurry of cash,” he said.
During the first half of 2020, when the pandemic was at its peak, a record $2 trillion surge in cash hit US bank deposit accounts – a reflection of the amount of cash circulating in the US economy. .
In April 2020 alone, deposits grew by $865 billion, more than the previous all-year high.
“That was really the core of the demand explosion. We definitely have Covid issues, we have the Russian invasion, I understand that,” Siegel said.
“But what the Fed should have done…is say, [it] needed the first stimulus after the Covid hit,” he said. “Then he should have told the government that you have to go to the bond market.. [it] can’t get help from the Fed.”
“Then interest rates would rise much sooner and we wouldn’t have the inflation problem that we have now,” he added.