Wharton professor Jeremy Siegel warns the Fed will drive the economy into a depression if they wait for core inflation to fall back to 2%

Wharton professor Jeremy Siegel
Wharton professor Jeremy Siegel is a long-time market commentator.REUTERS/Steve Marcus
  • Not even September's stubbornly high CPI report could change Jeremy Siegel's view that the Fed needs to stop hiking interest rates.

  • Siegel told CNBC on Thursday that the Fed's focus on lagging indicators is setting the economy up for disaster.

  • "If the Fed waits for the core to get down to 2% year-over-year, it will drive the economy into a depression," Siegel warned.

The release of September's CPI report on Thursday showed that inflation remains stubbornly high, but that's not enough to convince Wharton professor Jeremy Siegel that the Federal Reserve should continue with its aggressive interest rate hikes.

In fact, Siegel warned that the Fed's overreliance on lagging inflation data could set the economy up for a disaster.

"If the Fed waits for the core [inflation] to get down to 2% year-over-year, it will drive the economy into a depression," Siegel told CNBC on Thursday.

Siegel highlighted that leading inflation indicators are coming down substantially, especially in the housing market, but that won't flow through official government inflation readings for months, if not years. "When will it get into the core? Months if not years down the line," Siegel said.

September's CPI report showed prices rose 0.4% month-over-month and 8.2% year-over-year, ahead of expectations for a respective 0.2% and 8.1% increase.

"I am not at all surprised by the number because the number is ridiculous. It has no meaning to what the actual rate of inflation is. Housing, which is almost 50% of the core rate, is the most distorted of all," Siegel explained.

The professor highlighted that the rate of increases in rent prices has slowed dramatically compared to last year, and he now expects housing prices to fall up to 15% from current levels as activity in the real estate market slows due to higher mortgage rates.

Siegel thinks the Fed is on the verge of going overboard with its monetary tightening policy. In addition to ongoing reductions in its balance sheet, the Fed is expected to raise interest rates by 75 basis points in both November and December following the September CPI report.

Those rate hikes would go too far in his opinion, and the Fed only has room for one more 50 basis point rate hike. "I think we're at a very tight moment now. I'd give them another 50 basis points, but if they do 75 [in November and] 75 [in December] and then move into 2023 with continuing with it, they're going to go overboard," Siegel said.

Much of the conundrum the Fed finds itself in is due to the fact that the pendulum of their monetary decisions has swung too far to one side during the pandemic. Now it's swinging to the other side.

In other words, the Fed was too easy for too long 0% interest rates during the pandemic and into early 2022, at a time when inflation was showing signs of increasing. They should have tightened sooner, according to Siegel. Now they're over correcting with interest rate hikes as inflation is high, but is leading indicators show signs it is falling.

And that overcorrection is what could send the US economy into more than just a recession—which is already expected by many commentators—and into a depression.

Read the original article on Business Insider