The Fed made a fatal mistake that will hurt us in 2023, says respected investment guru

Renowned finance professor, seasoned investor, and investment guru Jeremy Siegel sees significant flaws in the Fed's actions that could have dire consequences, while reminding us that they are making the same mistakes they made a year ago. Jeremy Siegel even says Jerome Powell is making one of the biggest policy mistakes in the Fed's 110-year history. What does he mean by this and what are the potentially catastrophic consequences of the Fed's actions?

Jeremy Siegel

Jeremy Siegel is an investor, economist, professor of finance and also comments extensively on the economy and financial markets. He appears regularly on networks including CNN, CNBC and NPR and writes regular columns for Kiplinger's Personal Finance and Yahoo Finance.

• The last Fed meeting was a highly speculative topic. Once again, investors split into two camps. The former sees the 75bps hike as weakness and an unnecessary drag on inflation for another x months, and the latter again see it as an aggressive and unnecessarily tight Fed stance. Which side do you fall on?

Where does Siegel see the problem?

Wharton professor Jeremy Siegel has a big problem with the Federal Reserve's aggressive interest rate hikes in an attempt to tame inflation and fears the central bank is making the biggest mistake in its history and could trigger a steep recession.

• Siegel said inflation is starting to drop significantly, but the Fed is still continuing to raise rates.

• I would only pause here to say that I strongly disagree with a significant drop in inflation and don't see it as rosy.

Siegel also said that this could be one of the biggest policy mistakes in the Fed's 110-year history because he sees some similarities to last year where the Fed remained so lax and blindsided when everything was booming.

At its last meeting, the Fed raised interest rates by another 75 basis points and said it expects further rate hikes toward the beginning of 2023, according to its updated dot plot.

"When you have all the commodities that are rising at a rapid pace, Chairman Powell and the Fed have said, 'We don't see any inflation. We don't see a need to raise interest rates in 2022." Now that all those same commodities and asset prices are falling, he says, "It's stubborn inflation that requires the Fed to remain hawkish until 2023." It makes absolutely no sense to me," Siegel said.

• Siegel pointed out that oil prices have fallen back to levels not seen since early 2022, before Russia's invasion of Ukraine, and home prices and homebuilding activity are starting to fall, which he said is another indicator of improvement.

"The only thing that's not falling is wages, and by the way, wages are more in a slightly upward trend," Siegel said.

"Why is the Fed putting the burden on these working people, on employed people, when prices of all sorts of commodities are demonstrably falling," said Siegel, who was almost indignant at the Fed's actions.

Siegel thinks the Fed is currently being unnecessarily tight. On the other hand, he compares it to the same mistake the Fed made last year. According to Siegel, the Fed has a lousy track record of accurately forecasting and further expectations from inflation.

Just a year ago, the median expectation for the Fed funds rate was less than 1% by the end of 2022 and 1.75% by the end of 2024. Today, the Fed funds rate is in the 3 to 3.25% range and is expected to sit at 4.5% by the end of this year.

You can find a number of his comments and opinions on YouTube at CNBC, where he regularly appears and comments on events. (402) Calling it poor monetary policy is an understatement, says Prof. Jeremy Siegel on Fed hikes - YouTube

What could be the consequences of these bad moves?

Siegel expects the Fed's overly tight actions will continue to weigh on stock prices, and if the Fed's tightening actions continue through 2023, "you can make sure we're going to see a major recession on the other side," Siegel said.

"I'm very upset. It's like a pendulum. They were too comfortable in 2020 and 2021 and now 'we're going to be really tough until we crush the economy,'" Siegel said of the Fed.

"I think they're going to be forced to cut rates a lot faster than they think," Siegel said, a move that could set stocks up for a potential recovery from their continued decline.

Conclusion

What's your take on this? Is the Fed making a fatal mistake? I certainly give Siegel credit, as he often speaks off the cuff, but in this case I may not agree with him entirely. As such, the decline in inflation did not strike me as so drastic that one could argue for a smaller rate hike or a softer stance and watch the whole situation unfold. Personally, I was one of those who wanted to see a more aggressive stance and show decisiveness at this meeting, which could have exacerbated the pain, but I saw the benefit in the time horizon. By that I mean that if the next economic data is relatively negative, I expect an unnecessarily extended inflationary period based on the Fed's soft stance.

Please note that this is not financial advice. Every investment must go through a thorough analysis.