The Fed needs to stop its aggressive inflation-fighting policy now, according to Wharton Professor Jeremy Siegel. The top economist said the CPI had an “upwards bias” due to lagging indicators. Siegel has urged central bankers to stop aggressively hiking rates in order to avoid a recession. Loading Something is loading.
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The Federal Reserve needs to end its aggressive inflation-fighting policy and stop hiking interest rates now, according to Wharton Professor Jeremy Siegel.
“If [Powell] looks at the actual rate of inflation with good housing data, not lagged housing data, we are in a deflationary mode. It is time to stop raising rates,” the top economist said in an interview with CNBC on Thursday.
Inflation has been elevated above the Fed’s 2% target for well over a year now, but the Core Consumer Price Index has an “upwards bias,” Siegel said, which means that officials could be overestimating the actual rate of inflation – and therefore do not need to tighten policy as much as they think.
He pointed to the fact that shelter prices are falling rapidly, though those changes will likely lag behind official CPI by around 18 months. More current estimates of shelter inflation from Zillow and the Federal Housing Authority show that housing prices are actually falling .7% month-to-month – a major drop in inflation, considering that housing accounts for about a third of headline CPI and 40% of core CPI.
The Fed’s committement to waging a fight it probably already won could spell trouble for the economy, Siegel said. Central bankers raised interest rates 425-basis-points last year to rein in inflation, but rates that are restrictive could overtighten the economy into a recession, he warned.
December inflation clocked in at 6.5% on Thursday, in-line with economists’ forecasts. But the lag in housing prices means that’s around 30- to 40-basis-points too high, Siegel estimated, who has urged the Fed for months to ease up monetary tightening efforts.
Officials have signaled they will continue to hike interest rates past 5% this year. Markets are expecting another 25-basis-point rate hike in February, bringing the Fed funds rate target to 4.5%-4.75%.
Other economists have warned that inflation still remains too big of a risk for the Fed to ease up on rate hikes now. Top economist Mohamed El-Erian noted the Fed is trying to repair its credibility after mistakenly calling inflation “transitory” in 2021, and can’t afford to let up on monetary tightening and let inflation expectations spiraling out of control.