Wharton Professor Jeremy Siegel Expects Fed To Start Cutting Rates In 2023: But Will It Be In Time To Avoid Recession?

Wharton professor Jeremy Siegel, who is one of the harshest critics of the U.S. Federal Reserve, weighed in on the central bank’s latest rate move.

Rate Cut In 2023: The Fed may go for a 25-basis point rate hike at the next monetary policy committee meeting scheduled for February, Siegel said during an interview with CNBC’s Street Sings. He noted that another set of employment and inflation reports will be in by the timeframe.

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By the March meeting, they may see a slowdown, Siegel said, adding that the housing market will likely continue to decline.

“That could be the very last one and I do not think they are going to get to those rates they indicated in the dot plot today,” he said.

Siegel expects the first rate cut to take place closer to the middle of 2023 and sees a more rapid move thereafter, as the labor market loosens up and inflation goes down.

Fed Had Made Progress: Siegel agreed that the Fed has made a lot of progress. In nine months since the tightening began, good prices and home prices have gone down, he said, citing comments by Fed Chair Jerome Powell. While Powell acknowledged that the decline in housing prices will not show up in the index in six to nine months, the current index showed house prices were down, Siegel said. Commodity prices were also headed southward, he added.

The indication from the Fed that it has to keep the fed funds rate at over 5% throughout 2023 risks a large recession toward the end of 2023 or into 2024, Siegel said. The Fed is going to be very wrong as they see a slowdown and much more progress and start lowering rates, he added.

Siegel said, "Is it in time to prevent a slowdown," and added that monetary policy tightening acts with a lag. Powell acknowledged that two-thirds of the tightening is yet to be felt, Siegel said.

“The fed funds rate is not like a steering wheel on a car and when you turn it one way, goes immediately to the right. There’s tremendous inertia, tremendous momentum,” he added.

If they see the economy slowing down, they could start even lowering rates and it could take six, nine months or a year for the economy to respond, Siegel said.

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