- According to Jeremy Siegel, the Fed’s fight against hyperinflation is almost over.
- He predicted that central bankers could start cutting interest rates as soon as March.
- The Wharton professor believes that the US could be at risk of a recession if the Fed does not withdraw interest rates soon.
According to Wharton professor Jeremy Siegel, the fight against hyperinflation is almost over, and this may give the Federal Reserve the green light to start cutting interest rates soon.
He pointed to the recent decline in inflation, with consumer prices rising just 3.2% year on year in October, down from a 3.7% pace in September.
While that’s still above the Fed’s 2% target, the latest data are a promising sign that “everything is clear on the inflation front,” Siegel said in an interview with CNBC on Wednesday.
“I really think the next step will be cuts, even if not a recession, just because we’re in a recession,” he said. “Actually, it may come by March next year. I want [Powell] To invert this curve,” he said, referring to the 2-10 Treasury yield curve, the bond market’s classic bearish gauge that flashes when short-term rates exceed long-term rates.
The Fed has raised short-term interest rates by 525 basis points over the past year, which Siegel previously warned could trigger a recession. However, the economy has remained surprisingly resilient amid tight financial conditions, with GDP growing by 4.9% in the last quarter.
Some experts have warned markets of the dangers of easing monetary policy too quickly. Cutting rates prematurely could drive down prices and potentially lead to 1970s-style stagflation.
But financial conditions at the time were completely different than today, Siegel said, because the Fed was no longer injecting liquidity into the market and had begun reducing the size of its balance sheet.
He suggested that central bankers now face a greater risk of raising interest rates too late, as the economy is already showing signs of slowing. Job growth slowed in October, while retail spending declined for the first time since March – a sign of potential weakness among US consumers.
However, Wall Street’s confidence in a soft-landing has increased as inflation continues to decline. Goldman Sachs cut its recession chances next year to just 15%. Bank of America had previously seen the US economy heading for a mild recession, but recently raised its outlook, saying in a note last week it saw the US headed for a soft landing.