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

26 Jul 2023

Wharton economist Siegel expresses a change in perspective regarding interest rates prior to the upcoming FOMC meeting, indicating that the Federal Reserve's approach is not as strict as initially anticipated.

Benzinga - Jeremy Siegel, a professor at Wharton University known for his outspoken views regarding the Federal Reserve's need to take immediate action, seems to have had a change of perspective.

What Occurred: According to Siegel's weekly WisdomTree commentary, the accumulation of evidence and recent data indicates that the Federal Reserve is not as restrictive as initially anticipated.

The Fed will not be completely exempted from my censure, as it continued to maintain excessively low interest rates throughout 2020 and 2021, and I am of the opinion that further hikes are unnecessary at present.

However, he expressed that the circumstances have altered, leading to a shift in his perspective regarding potential economic risks in the future.

Siegel pointed out that leading indicators such as the amount of money in circulation, the prices of housing and commodities, have all increased. He anticipates that deposits made with the Federal Reserve will experience growth once again this week. "This is one major factor that is reducing my worry," he mentioned.

According to the economist, the housing market has experienced a positive shift in the past three months, as evidenced by various national house price indices such as Case-Shiller. Additionally, he mentioned that commodity prices, which are highly influenced by economic factors, seem to have reached their lowest point and have started to increase.

Siegel pointed out that the Bloomberg Commodity Index, which experienced a significant drop of 20-25% in May from its peak, has shown signs of recovery lately.

These three signals suggest that the present actual rates and the projected course of the Fed rate are not unreasonably elevated.

Siegel expressed his anticipation of the Federal Reserve raising rates by an additional 25 basis points in the upcoming week. He stated that while he still believes this action poses more potential harm to the economy than growth benefits, the gap between the two is not as pronounced as previously anticipated.

The economist anticipates that the yields for 10-year TIPS will decrease back to 1%, while he has increased his estimate for the neutral fed funds rate by one percentage point to a range of 2.5% to 3%.

Why It Matters: The Federal Open Market Committee (FOMC), which is responsible for establishing monetary policies, will convene for a two-day session starting on Tuesday. According to futures market predictions, there is a 98.9% chance of a 25 basis points increase, bringing the rates to 5.25%-5.50%. Additionally, there is a 1.1% likelihood of a more substantial 50 basis points increment.

The recent economic information, particularly the indicators that show what has already happened, have been varied, raising uncertainty about the future of the economy.

Check out this interesting article: 'Our Prediction Was Incorrect:' Morgan Stanley Pessimistic Expert Concedes to Victorious Market Surge, Yet Highlights Potential Obstacle in the Later Half

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Check out the original post on Benzinga.