Wharton's Siegel Sings A New Tune On Interest Rates Ahead Of FOMC Meet: 'Fed Is Not As Tight As I Feared'

Wharton professor Jeremy Siegel, who in the past has been vocal about an immediate pause by the Federal Reserve, apparently has had a change of heart.

What Happened: The cumulative weight of evidence and recent data suggest the “Fed is not as tight as I feared,” said Siegel said in his weekly WisdomTree commentary.

“This will not give the Fed a full reprieve from my criticism: the Fed still kept interest rates far too low in 2020 and 2021 and I do not believe it needs to hike any more at this point.”

He, however, said facts have changed, which in turn has changed his view on forward economic risks.

Siegel noted that forward indicators such as money supply, housing and commodity prices have all ticked up. He expects weekly deposits with the Fed to grow again this week. “This is one big factor causing me less angst,” he said.

Housing prices have also turned the corner over the last three months, the economist said, pointing to the Case-Shiller and other national house price indices. Commodity prices, which are extremely sensitive to economic pressure, appear to have bottomed and ticked up, he said.

To make his case, Siegel noted that the Bloomberg Commodity Index, which plummeted 20-25% in May from the highs, has firmed recently.

“Those three indicators imply the current real rates and the Fed rate path projection is not excessively high.”

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Siegel said he expects the Fed to hike rates another 25 basis points this week. “I would still say the downside risks to the economy of this action outweigh the upside growth risks, but not by as much as before,” he added.

The economist now expects the 10-year TIPS yields to revert down to 1% and he raised his neutral fed funds rate estimate by a point to 2.5%-3%.

Why It's Important: The Federal Open Market Committee – the monetary policy-setting arm of the Fed, will meet on Tuesday for a two-day meeting. The futures market is pricing in a 98.9% probability of a 25 basis points hike to 5.25%-5.50%  and a 1.1% probability of a 50-basis-point increment.

Economic data, at least the lagging indicators, have been mixed, casting a cloud on the economic outlook.

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