Fed hikes to 4% will drive stocks lower, says Siegel

  • US stocks bottomed in June, but the market could fall again if the Fed remains too aggressive, Jeremy Siegel said on Tuesday.
  • The federal funds rate is already above a neutral level in the 2.25% to 2.5% range, 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 good for the U.S. stock market, but it will go through the lows set in June if the Federal Reserve decides to raise interest rates to 4% or more, Wharton professor Jeremy told CNBC on Tuesday. Siegel.

“We’ll have maybe 100 basis points left…maybe 50-25-25,” in terms of the size of the rate hike by the Fed in its continued efforts to bring down high inflation, Siegel said in an interview. The Fed has raised the federal 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 a raise. I’m not saying, ‘Stop now’. But if they take a very aggressive 75-50-50 move down to four, four and a half, five percent, I think they’re going to be sorry for being so tight.”

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

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

The S&P 500 last week marked a fourth consecutive week of gains and, since Monday, has narrowed its year-to-date loss to around 9.8%. The index rebounded from its bear market in part on the idea that the Fed will back away from rate hikes and embrace rate cuts next year as inflation cools and economic activity contracts. potentially.

The world’s largest economy could see a “soft landing” if the central bank loosens its grip on the money supply, which Siegel said has seen “the biggest downturn we’ve ever seen.”

A soft landing is “not a sure thing. But I’m getting more optimistic about it,” said Siegel, whose books include “Long-Term Stocks: The Definitive Guide to Financial Market Returns and Strategies.” ‘long-term investment’.

Siegel said the United States is already above a neutral interest rate — or a level at which the federal funds rate neither fuels nor chokes off economic activity.

“If we go to five percent, we’re absolutely going to have a very reversed situation. [yield] curve and definitely guarantee a recession,” he said. “So they need to be aware that their 2.5% – which is our long-term federal funds rate under a 2% inflation scenario – is really too high. It really should be around one and a half percent.”

Headline inflation was 8.5% in July, down from 9.1% in June, which 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.

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