The U.S. Federal Reserve has raised rates too quickly, and the risks of a recession will be “extremely” high if it continues to do so, said Jeremy Siegel, professor emeritus of finance at the Wharton School of the University of Pennsylvania.
“They should have started tightening much, much earlier,” he told CNBC’s “Street Signs Asia” on Friday. “But now I’m afraid they’re slamming on the brakes too hard.”
Siegel said he was one of the first to warn of “inflationary policies” by the Fed in 2020 and 2021, but “the pendulum has swung too far in the other direction.”
“If they stay as tight as they say they will, continuing to raise rates even into the first part of next year, the risks of a recession are extremely high,” he said.
Most of the inflation is behind us, and then the biggest threat is recession, not inflation, today.
Jeremy Siegel
professor at Wharton
The official data, which is usually delayed by a month, may not immediately show the changes taking place in the real economy, he said. “Most of the inflation is behind us, and then the biggest threat is recession, not inflation, today.”
Siegel said he believes interest rates are high enough to bring inflation down to 2 percent, and the final rate, or endpoint, should be between 3.75 percent and 4 percent.
In September, the Fed raised benchmark interest rates by three-quarters of a percentage point to a range of 3% to 3.25%, the highest since early 2008. The central bank also noted that the terminal rate could be as high. 4.6% in 2023.
“I think that’s too, too high, given the policy delays, that would really force a contraction,” he said.
According to CME Group’s FedWatch tracker of Fed funds futures bets, the probability that the target rate range will reach 4.5% to 4.75% in February next year is 58.3% .
If it were up to him, Siegel said, he would raise rates half a point in November, then wait and see. If commodity prices start to rise and the money supply increases, the Fed should do more.
“But my sense is that when I look at sensitive commodity prices, asset prices, housing prices, even rental prices, I see declines, not increases,” he said.
But not everyone agrees. Thomas Hoenig, former president of the Federal Reserve Bank of Kansas City, said rates need to be higher for longer.
“My view is that you have to raise the rate. If inflation is 8%, you have to raise the rate,” he told CNBC’s “Street Signs Asia.”
“They need to stick with it and not pull back too soon to re-ignite inflation in, say, the second quarter. [of] 2023 or the third quarter,” he added.
— CNBC’s Jihye Lee contributed to this report.
