Wharton Professor Siegel warns Fed policy ‘misguided’

Chairman of the Federal Reserve Jerome Powell testified before the Senate Banking Committee this week, and while his comments did not stray from the usual script, the markets feared his unwavering commitment to fight inflation with rising interest rates.

“The latest economic data came in stronger than expected, suggesting that the final level of interest rates is likely to be higher than previously expected,” he told senators, referring to the strong in January work report and indicators of stability consumer spending. The S&P 500 fell 1.5% after Powell spoke, and has struggled all week.

The Fed chair’s comments come after a war on inflation that has lasted more than a year, in which Fed officials have raised interest rates eight times to cool the economy. So far, their efforts have yielded mixed results. Year-over-year inflation, as measured by the consumer price index, dropped from a 9.1% peak in June to 6.4% last month. But Powell said this week that even if inflation is slowing, the path back to the Fed’s 2% target is “likely to be bumpy.”

That means interest rates should be higher, which is bad news for many investors, home buyers, and businesses. But Wharton Professor Jeremy Siegel believes the Fed Chair is wrong.

“I think the Fed’s policy is very wrong and let me tell you why,” he said SPOKE CNBC Thursday. “This month is the third anniversary of the COVID crisis. During that time, wages have been lower than inflation. It is hard to argue that wages are the cause of inflation when they are lower than inflation.

Siegel noted that wages in the US typically rise 1% to 2% more than inflation. “Labor is very far from where it has historically been in the last three years,” he said.

In his point, median weekly real income in the US, which accounts for the impact of inflation, decreased more than 7% between the second quarter of 2020 and the end of last year. And in January, real average hourly earnings, which also account for inflation, fell 1.8% year-over-year, according to Bureau of Labor Statistics.

However, in his testimony to Congress this week, Powell made it clear that he believes wage growth needs to slow to beat inflation.

“Wages affect prices and prices affect wages,” he said. “I think that some softening of labor market conditions will happen — will happen as we try to control inflation.”

Siegel, on the other hand, argued that the increase in wages was due to a lack of available workers. In February, there were almost 10.8 million job openings in the US, but only 5.7 million unemployed workers. Siegel believes that Powell is trying to correct the lack of labor supply by raising interest rates, but it is not working.

“It’s not the Fed’s job to balance a shift in the supply side. They control aggregate demand. I think their focus on how tight the labor market is — suddenly, a monomaniacal type of focus—is the wrong way to go about it,” he said.

Siegel argued that Powell should abandon raising interest rates in March, especially to an outsized 50 basis points, and wait for the effects of previous rate hikes to work through the economy and slow inflation. He taught to disappear commodity price, freight shipping ratesand housing market activity as evidence that Powell has made progress toward his goal of price stability.

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