Hike rates

Siegel: Fed will soon hike rates, slamming stocks

Economist Jeremy Siegel is generally bullish on the stock market, but not in the face of ever-higher inflation, which has now topped 5% for five straight months. He therefore predicts that the Federal Reserve will soon raise short-term interest rates, which will have a detrimental effect on the market.

His remarks, made on CNBC, came after Wednesday’s publication of the Consumer price index (CPI) for October, up 6.2% in the previous 12 months, the biggest increase since 1990. This news triggered a sharp decline in the market, ending with a small rise in the S&P 500 on Thursday. “It was an awkward report,” especially for stocks, he said.

“Stocks like inflation until the Fed got serious about it, and they didn’t get serious about it,” Siegel said. Right now, the market’s reaction to the latest inflation report is a bump, he added. However, once the Fed tightens policy, he predicted that investors would drive down stock prices. Nothing will happen, he explained, “until the Fed changes direction and says, ‘You know what, we have to get a lot more serious.'”

Siegal, a professor at the Wharton School at the University of Pennsylvania, pointed out that the Fed’s decision-making body meets From December 14 to 15, shortly after the next CPI release, December 10. “Maybe it will be at the December meeting,” Siegel suggested, regarding a rate hike decision. “Maybe it will be a little later.”

The first step, he said, would be for the Fed to act sooner than expected to raise the federal funds rate, now close to zero. The strengthening of this benchmark for short-term rates should largely begin in 2023. The central bank could also accelerate the reduction of its bond purchases, a program which has an impact on longer-term rates. Such elimination is expected to begin later this month and last until mid-2022.

Siegel has been warning for months that inflation is fiercer than the Fed and its chairman, Jerome Powell, have portrayed. Even Powell, however, has hinted recently that the Fed may be forced to fight rising prices if inflation does not cool. His line was that the CPI spiral is temporary, mostly related to supply chain issues.

The professor noted that a host of factors are propelling the market higher, such as ample liquidity, seasonal year-end surges in buying stocks and a scarcity of better investment alternatives. Although a little inflation has long supported stocks, as it indicates a growing economy, too much of it ends up hurting investors, he said. Indeed, technology stocks, at the forefront of the current rally, do not react well to higher rates, which tend to reduce expected future earnings.

For now, he says, the positives are outweighing inflation, “until Powell comes along and says, ‘You know what, this isn’t temporary. It’s more serious than expected. We are going to have to accelerate the reduction and we may have to accelerate the increase in interest rates. ”

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Tags: Federal Reserve, inflation, Jeremy Siegal, Jerome Powell, Stock Market, Wharton