The stellar jobs report on Friday could be bad news for stocks and the economy, Jeremy Siegel said.
The Fed may keep hiking interest rates to keep inflation in check, the Wharton professor warned.
Siegel still expects the Dow Jones Industrial Average to climb 18% to 40,000 points by 2025.
The US economy’s surprising resilience could be bad news for stocks, and might raise the risk of a recession this year, Jeremy Siegel has warned.
Load Error
The US added 517,000 jobs in January, government data released Friday showed, crushing the 185,000 consensus nonfarm payrolls estimate from economists surveyed by Bloomberg. At the same time, the US unemployment rate fell to 3.4%, its lowest level in more than 50 years.
Siegel, a professor emeritus of finance at the Wharton School, said in a Fox Business interview Friday that the unexpected strength of the labor market could result in the Federal Reserve keeping interest rates higher for longer.
In response to historic inflation, the US central bank has raised rates from nearly zero to almost 5% within the past year. Higher rates can curb price growth by making borrowing more costly and encouraging saving over spending and investing. But they can also crimp demand and sap economic growth.
Elon Musk, Paul Krugman, and Jeremy Siegel are warning the Fed risks hiking rates too high and tanking the US economy. Here’s where 7 experts see danger.
Elon Musk, Paul Krugman, and Jeremy Siegel say the Fed may be going too far with its rate hikes.
Bill Gross and David Rosenberg have also warned the central bank against tanking the US economy.
Here’s what 7 experts have said about the danger of an overzealous Fed.
Elon Musk, Paul Krugman, and Jeremy Siegel have warned the Federal Reserve risks going too far in its fight against inflation, raising the prospect of a painful recession.
Bill Gross, David Rosenberg, Robert Herjavec, and Ed Yardeni have also urged the US central bank not to hike interest rates too high, given the potentially devastating impact on the economy.
Here’s a roundup of the 7 experts’ cautions to the Fed:
Elon Musk
“The Fed is raising rates more than they should,” Musk said on Tesla’s third-quarter earnings call. “But I think they’ll eventually realize that and bring it back down again.”
The Tesla CEO and Twitter owner suggested the US central bank is overly focused on lagging indicators of inflation, and not paying enough attention to what’s ahead.
“The Fed is not listening, because they’re looking at the rearview mirror instead of looking out the front windshield,” Musk said.
Paul Krugman
“I see a strong case that the Fed has already done enough,” Krugman said in a recent column. “You want to shoot ahead of a moving target, not behind it.”
The Nobel Prize-winning economist pointed to the sharp decline in trans-Pacific shipping costs, plus flagging demand for apartments, as evidence of the inflation threat waning.
He also flagged the strong dollar’s dampening effect on US exports, and higher mortgage rates squeezing consumers and making houses less affordable.
“I’d argue that these indicators tell us that the Fed has already done enough to ensure a big decline in inflation — but also, all too possibly, a recession,” Krugman said.
Jeremy Siegel
“The Fed is slamming on the brakes way too hard,” Siegel said in a recent interview.
“The pendulum has swung too far in the other direction,” the Wharton professor added, referring to US monetary policy going from too loose to overly restrictive.
“If they stay as tight as they say they will, continuing to hike rates through even the early part of next year, the risks of recession are extremely high,” Siegel said.
Bill Gross
“The US and other economies cannot stand many more rate increases,” Gross said in a recent investment outlook.
Gross argued that huge amounts of government debt, and global headwinds such as the Russia-Ukraine war, meant that if the Fed hikes rates too far, it could “slay inflation but create a global depression.”
“If Fed stops at 4.5% then mild recession,” Gross tweeted this week. “If it goes to 5% or higher then significant US and global downturn.”
David Rosenberg
“I would posit that the Fed has already done the overkill,” Rosenberg said in a recent interview.
The Rosenberg Research founder suggested Fed officials have a “once burnt, twice shy” mentality after reacting too slowly to the inflation threat, so they’re overreacting now by raising rates too aggressively.
If the Fed continues to tighten its monetary policy, it could tank house prices, spark a credit crunch in the banking sector, weaken consumer spending, and make any economic downturn last longer, Rosenberg said.
Robert Herjavec
Consumers and enterprises are still spending money, but rising interest rates will eventually stifle that demand, Herjavec said in a recent interview.
“I worry we’re going to hit a wall, and the interest rates are going to catch up to us, and the whole thing is just going to stop,” the “Shark Tank” investor and Cyderes CEO said.
Herjavec added that he’s more worried about the Fed’s “maniacal drive with interest rates” than he is about inflation.
Ed Yardeni
“I think the Fed has to be really careful here,” Yardeni said in a recent interview.
“If they keep going without pausing, it’s really going to create a real possibility of a significant recession,” he added.
The Yardeni Associates boss pointed to declining food and energy prices as evidence that inflation is on the decline. He noted the Fed’s tightening has already hammered the housing market, and fueled the stock-market’s sharp decline this year.
8/8 SLIDES
Moreover, rate changes can take several months to ripple through the economy and fully set in. The Fed may be courting disaster if it keeps hiking, Siegel cautioned.
“This tremendous tightening, one of the greatest in history, its effects have not been felt,” he said in the interview. “I would prefer that they stop now; I think there’s enough evidence that prices are down, that they could pause and wait and see the course.”
“Continued increases will increase the risk of a recession in the second half of this year,” he said. “Hard to believe given this blowout jobs report that we had Friday, but that can turn around very, very quickly.”
Siegel emphasized that underlying prices have cooled sharply over the past three months. He urged the Fed not to crack down on wage growth, as higher wages will help fill job vacancies, and many workers need higher pay to catch up with inflation.
The author of “Stocks for the Long Run” also outlined his reaction to the jobs report in a Bloomberg interview on Friday.
“Now it looks like the pause of the Fed is less likely,” he said, although he noted other data releases could change the economic picture by the time of the next Fed meeting in late March.
Siegel underscored that a strong economy could weigh on the stock market. While it supports larger corporate profits and therefore higher stock prices, it can also precipitate higher rates, dampening demand and reducing the appeal of stocks relative to bonds and savings accounts.
Still, the veteran professor reiterated his view that the benchmark Dow Jones Industrial Average US stock index will climb 18% to 40,000 points by 2025.
“That’s a very eminently reasonable projection, and in fact it could go higher,” he said.
Prior to the jobs report, Siegel predicted the Fed would cut rates significantly later this year in response to cooling inflation, a weakening labor market, and the rising risk of recession. He also suggested stocks could notch a roughly 15% gain this year.
