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's Siegel has a change of heart regarding interest rates prior to the FOMC meeting: 'The Fed is not as strict as I anticipated.'

Benzinga - Jeremy Siegel, a professor at Wharton University known for previously advocating for the Federal Reserve to take a break, seems to have had a change of opinion.

What Occurred: Based on the collective evidence and current information, it seems that the Federal Reserve is not as strict as I initially thought, stated Siegel in his weekly analysis for WisdomTree.

The Federal Reserve will not be completely exempt from my disapproval, as I firmly believe that they have maintained interest rates at excessively low levels throughout 2020 and 2021. Accordingly, I do not perceive any necessity for them to raise the rates any further at this juncture.

However, he expressed that the facts have undergone alterations, consequently shifting his perspective regarding potential economic risks ahead.

Siegel pointed out that leading indicators like the supply of money, housing, and commodity prices have all increased. He anticipates a growth in weekly deposits made with the Federal Reserve this week. "This is a significant factor that is easing my worries," he expressed.

According to the economist, the housing market has shown signs of improvement in the past three months, as indicated by the Case-Shiller and other nationwide home price indexes. Additionally, the economist mentioned that commodity prices, being highly influenced by economic conditions, seem to have reached their lowest point and started to rise.

To present his argument, Siegel pointed out that the Bloomberg Commodity Index, which experienced a significant decrease of 20-25% in May from its peak, has shown signs of stabilization in recent times.

These three indicators suggest that the current actual rates and the projected path of the Federal Reserve's rates are not unreasonably high.

Siegel mentioned that he anticipates the Federal Reserve to increase rates by an additional 25 basis points in the upcoming week. He further stated that while he believes the potential negative impacts on the economy from this decision are greater than the potential growth advantages, the margin of difference between the two has decreased compared to the previous timeframe.

The economist's new prediction is that the 10-year TIPS yields will decrease to 1%, and he increased his estimate for the neutral fed funds rate by one percentage point to 2.5%-3%.

The blog section below provides information about the significance of an upcoming meeting of the Federal Open Market Committee (FOMC), which plays a crucial role in determining monetary policies. This two-day meeting, scheduled for Tuesday, is expected to result in a 25 basis point increase, raising the rates to 5.25%-5.50%. Additionally, there is a 1.1% chance of a 50-basis-point increase according to predictions in the futures market.

The recent economic information, particularly the indicators that show what has happened in the past, have been a combination of positive and negative, creating uncertainty about the future of the economy.

Check out this interesting article: 'Our Prediction Was Incorrect:' Pessimistic Morgan Stanley Analyst Surrenders to Market Rally, But Highlights Potential Obstacle in the Latter Part of the Year.

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Check out the original blog post on Benzinga's website