Jeremy Siegel slammed the Fed for fanning inflation, and warned it may spark an avoidable recession.
The Wharton professor told Insider that he expects the Fed to cut interest rates later this year.
Siegel explained why some wage inflation is desirable, and sounded the alarm on the US money supply.
Elon Musk, Paul Krugman, and Jeremy Siegel are warning the Fed risks hiking rates too high and tanking the US economy. Here’s where 7 experts see danger.
Elon Musk, Paul Krugman, and Jeremy Siegel say the Fed may be going too far with its rate hikes.
Bill Gross and David Rosenberg have also warned the central bank against tanking the US economy.
Here’s what 7 experts have said about the danger of an overzealous Fed.
Elon Musk, Paul Krugman, and Jeremy Siegel have warned the Federal Reserve risks going too far in its fight against inflation, raising the prospect of a painful recession.
Bill Gross, David Rosenberg, Robert Herjavec, and Ed Yardeni have also urged the US central bank not to hike interest rates too high, given the potentially devastating impact on the economy.
Here’s a roundup of the 7 experts’ cautions to the Fed:
Elon Musk
“The Fed is raising rates more than they should,” Musk said on Tesla’s third-quarter earnings call. “But I think they’ll eventually realize that and bring it back down again.”
The Tesla CEO and Twitter owner suggested the US central bank is overly focused on lagging indicators of inflation, and not paying enough attention to what’s ahead.
“The Fed is not listening, because they’re looking at the rearview mirror instead of looking out the front windshield,” Musk said.
Paul Krugman
“I see a strong case that the Fed has already done enough,” Krugman said in a recent column. “You want to shoot ahead of a moving target, not behind it.”
The Nobel Prize-winning economist pointed to the sharp decline in trans-Pacific shipping costs, plus flagging demand for apartments, as evidence of the inflation threat waning.
He also flagged the strong dollar’s dampening effect on US exports, and higher mortgage rates squeezing consumers and making houses less affordable.
“I’d argue that these indicators tell us that the Fed has already done enough to ensure a big decline in inflation — but also, all too possibly, a recession,” Krugman said.
Jeremy Siegel
“The Fed is slamming on the brakes way too hard,” Siegel said in a recent interview.
“The pendulum has swung too far in the other direction,” the Wharton professor added, referring to US monetary policy going from too loose to overly restrictive.
“If they stay as tight as they say they will, continuing to hike rates through even the early part of next year, the risks of recession are extremely high,” Siegel said.
Bill Gross
“The US and other economies cannot stand many more rate increases,” Gross said in a recent investment outlook.
Gross argued that huge amounts of government debt, and global headwinds such as the Russia-Ukraine war, meant that if the Fed hikes rates too far, it could “slay inflation but create a global depression.”
“If Fed stops at 4.5% then mild recession,” Gross tweeted this week. “If it goes to 5% or higher then significant US and global downturn.”
David Rosenberg
“I would posit that the Fed has already done the overkill,” Rosenberg said in a recent interview.
The Rosenberg Research founder suggested Fed officials have a “once burnt, twice shy” mentality after reacting too slowly to the inflation threat, so they’re overreacting now by raising rates too aggressively.
If the Fed continues to tighten its monetary policy, it could tank house prices, spark a credit crunch in the banking sector, weaken consumer spending, and make any economic downturn last longer, Rosenberg said.
Robert Herjavec
Consumers and enterprises are still spending money, but rising interest rates will eventually stifle that demand, Herjavec said in a recent interview.
“I worry we’re going to hit a wall, and the interest rates are going to catch up to us, and the whole thing is just going to stop,” the “Shark Tank” investor and Cyderes CEO said.
Herjavec added that he’s more worried about the Fed’s “maniacal drive with interest rates” than he is about inflation.
Ed Yardeni
“I think the Fed has to be really careful here,” Yardeni said in a recent interview.
“If they keep going without pausing, it’s really going to create a real possibility of a significant recession,” he added.
The Yardeni Associates boss pointed to declining food and energy prices as evidence that inflation is on the decline. He noted the Fed’s tightening has already hammered the housing market, and fueled the stock-market’s sharp decline this year.
8/8 SLIDES
Jeremy Siegel blames the Federal Reserve for the historic spike in inflation last year, and fears the US central bank will drag the economy into an unnecessary recession, he told Insider in an interview this week.
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The retired Wharton finance professor also predicted the Fed will reverse course and start cutting interest rates before the end of this year.
The buck stops at the Fed
Inflation reared its head last year because the Fed and Treasury went overboard in shoring up the economy during the pandemic, Siegel said.
He acknowledged that officials had to offer some aid to offset the painful impact of travel restrictions, business closures, and supply-chain disruptions. But they didn’t need to leave the floodgates open for two years, he said.
Excessive fiscal and monetary stimulus caused the US money supply to balloon between March 2020 and March 2022, he continued. The deluge of liquidity was the key driver of inflation, whereas labor shortages and the shock to food and fuel prices from Russia’s invasion of Ukraine last spring were relatively minor factors, he added.
“The core inflation was already in place,” he said.
Headline inflation soared as high as 9.1% in June, spurring the Fed to hike interest rates from virtually zero to nearly 5% within the past year, and to signal further increases are coming. While higher rates may slow the pace of price increases by deterring spending and borrowing, they can also soften demand and stall economic growth, boosting the risk of a recession.
“The Federal Reserve put on the brakes very, very hard,” Siegel told Insider, even though “inflation is basically over.”
The veteran academic pointed to rental and housing markets cooling off in recent months as proof the threat is fading fast. Moreover, he urged the Fed to allow some wage inflation. Higher salaries help fill gaps in the workforce, and many American workers need pay bumps just to keep up with soaring living costs, he said.
“We’re going to have some inflation in the service sector because of the wage increases,” he continued. “To crush those you would really have to crush the rest of the economy.”
Siegel’s view is that the Fed overheated the economy, and now it’s cooling it too quickly. Yet he still expects Fed Chair Jerome Powell and his colleagues to pivot from hiking to cutting in a matter of months.
“I think they will decrease the rate by the end of the year,” he said.
Siegel, a senior adviser to asset manager WisdomTree, also expressed concern about a rare decline in the total value of cash, bank deposits, and short-term savings in the US last year.
“That somewhat scares me,” he said, adding that the Fed should return to growing the money supply at a normal rate of around 5% a year. Americans running short of money could be disastrous, as consumer spending is key to US economic growth.
Finally, Siegel underscored his surprise at the shockingly strong jobs report for January. A resilient labor market slightly reduces the risk of a near-term recession, he said. However, he emphasized that if the money supply continues to shrink, “the chances of a recession later this year or early next year are going to be much higher.”
