Fed hikes to 4% will push stocks down, says Siegel

  • US stocks bottomed out in June, but the market could fall again if the Fed remains overly aggressive, Jeremy Siegel said Tuesday.
  • The Fed Funds rate is already above neutral with a range of 2.25% – 2.5%, he said.
  • A soft landing for the economy is possible if the Fed loosens its grip on the money supply, Siegel said.

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

“We may have 100 basis points left…maybe 50-25-25,” in terms of the magnitude of the Fed’s rate hikes in its ongoing effort to curb 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 holds policy meetings in September, November and December.

“We need some raise. I’m not saying, ‘Stop now.’ But if they take a very aggressive 75-50-50 move to four, four and a half, five percent, I think they’ll regret being so tight.”

Wages in certain sectors of the economy are going up, but house prices “on the ground” – a major inflationary force in the past two years – are falling and forward-looking, sensitive commodity prices are not going up, he said.

“And I think if the Fed looks at that, they don’t have to go more aggressively. So I think the market has it here. I think June will be a bottom and I think the second half of the year will be very good.” be,” he said.

The S&P 500 marked a fourth straight week of gains last week, and as of Monday, the loss has narrowed to about 9.8% so far. The index rebounded from its bear market, in part because the Fed will refrain from rate hikes and make rate cuts next year as inflation cools and economic activity may contract.

The world’s largest economy could make a “soft landing” if the central bank loosens its grip on the money supply, which, according to Siegel, is “the biggest slowdown we’ve ever seen.”

A soft landing is “not certain. But I’m getting more optimistic about that,” says Siegel, whose books include “Long-Term Stocks: 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 Fed Funds interest rates do not fuel or choke economic activity.

“If we go to five percent, we definitely have a very inverse” [yield] “So they need to be aware that their two and a half percent — which is our long-term Fed fund rate under a two percent inflation scenario — is really too high. It really should be about one and a half percent.”

Headline inflation stood at 8.5% in July, down from 9.1% in June, which marked its 41-year high. Gross domestic product contracted 0.2% in the second quarter, after economic activity contracted by 1.6% in the first quarter of 2022.

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