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.
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.
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.”