The Federal Reserve must get “more aggressive” in 2022 by increasing interest rates and tapering down asset purchases in order to tame inflation, according to Wharton finance professor Jeremy Siegel. “The Fed is way behind the curve … and should have started raising interest rates by now,” he said on the Wharton Business Daily show on SiriusXM as he forecast market and economic trends for 2022. (Listen to the full podcast above.)
Siegel predicted the Dow and the S&P 500 will continue to climb in the year ahead, albeit at a slower pace than in 2021. The stock markets will face some headwinds when the Fed raises rates, but “stocks are real assets, and you want to hold real assets when there is inflation,” he said. His biggest concern is about containing the double-digit growth in money supply, which he said is not consistent with inflation at rates of even 2% or 3%. But with inflation edging towards 6%, he expected pressure on wage growth and resulting repercussions in the labor markets.
Following is an edited version of his interview.
Wharton Business Daily: Give us your overview on how you thought 2021 was from a market perspective.
Jeremy Siegel: Early on in 2021, I saw the burst of the money supply that was produced by the Federal Reserve, and that really clued me in on what was going to happen. I had never seen such a strong provision of liquidity, and I knew it would first go into the markets because spending was repressed. But I had predicted that we were going to have substantial inflation in 2021, and so what has happened has not surprised me.
Wharton Business Daily: Are we past the point where we consider the rise in inflation to be transitory?
Siegel: Absolutely. It was never transitory in the sense that it’s only going to be a few months. In fact, I have been saying for over six months that I think the cumulative amount of inflation that we’re going to have over the next three or four years will be 20% to 25%. Now, I don’t mean that in one year. It’s impossible to know how it’s going to exactly be distributed. But when we come out of this, the price level of goods and services will be about 25% higher.
Wharton Business Daily: What will that mean for the path of the Fed?
Siegel: The Fed is way behind the curve, and I’ve been saying this for quite a while. They should have stopped the tapering and should have started raising interest rates by now. The Fed must get more aggressive. (Federal Reserve officials in December projected at least three quarter-percentage-point rate increases in 2022, signaling their concern over rising inflation. The Fed also stated that it would reduce its asset purchases in 2022 as part of a tighter monetary policy.)
Wharton Business Daily: Will we see incremental increases in rates, maybe by 25 basis points [each time] in early 2022?
Siegel: We may even have to jump 50 basis points. If we have inflation rising at six, seven percent, baby steps are not going to do it…. As long as the interest rate stays so far below the rate of inflation, it just encourages people to borrow and buy goods.
“[The Federal Reserve] should have stopped the tapering and should have started raising interest rates by now.”
Wharton Business Daily: What are your thoughts on the move by the Biden administration to again nominate Jerome Powell for Fed Chair?
Siegel: …Powell has the confidence of Wall Street. There is continuity. There’s a huge historical record of Democrats taking Republicans as Chair of the Federal Reserve. I have called Powell the most dovish [Fed] chairman that I know, and so he is not far from what the Democrats generally support in terms of stimulating the economy.
Wharton Business Daily: You have an economy which is building itself back, but still is not where it was in 2019. From a policy perspective, it becomes that much more important for the Fed and for the Biden administration to get their ducks in a row here going into 2022, to make the biggest push that they can.
Siegel: Yes. By the way, the economy is not going to come back to 2019. We’ve had a permanent shock to the economy and to the labor supply that’s only partially going to be rectified. So, the world has changed. We also know that Biden has three or four more picks for Fed positions on the Board. And so he still has a lot of opportunity…..
Outlook for Stocks
Wharton Business Daily: The Dow Jones index has seen a 20% bump last year from where we were at the beginning of the year. Are you optimistic that we can have even half that in 2022?
Siegel: 2021 has been a great year for the S&P 500 as well. [In 2022], it will be more modest. There will be some headwinds when the Fed pivots. But basically, stocks are real assets. And you want to hold real assets when there is inflation. So I could see the S&P hitting 5,000 in toward the end of 2022, much more modestly than [in 2021]. But still a positive gain. The Dow [could also gain] several thousand more points, [although] I’m not saying it will hit 40,000.
“We’ve had a permanent shock to the economy and to the labor supply that’s only partially going to be rectified.”
It will eventually happen. Dow 36,000 finally happened for Kevin Hassett and James Glassman. Their book was written in 2000. It took 21 years.
Long-term trends are always favorable for the markets, still. I do not regard the market as cheap, but I do not regard the market as wildly overvalued [either]. I’m not talking about every stock, but the bulk of the market and the S&P 500 are quite reasonably priced given the economic circumstances.
Wharton Business Daily: So what are the couple of things you are most watchful of, thinking about policy, thinking about the markets … this entire mix. As we go into 2022, what is really keying your interest?
Siegel: I look at the money supply. And it’s been out of control. Although it has slowed a little bit, it’s still going up at double-digit rates. That’s not consistent with 2% or even 3% rates of inflation. We must get liquidity under control in the economy. The only way, really, to do that, is for the Federal Reserve first to stop the taper, and secondly, to raise rates. If they can do that, and stop the growth of this liquidity, we’ll finally get that inflation under control.
Wharton Business Daily: How much then are you also focused on some of these issues around labor that we’ve been seeing play out?
Siegel: Well, there are two labor markets. Those that are active and moving around are getting 10%, 15%, 20% raises. Who’s losing now are the white-collar workers that got their 3% raise in January 2021, and now we have inflation of over 6%. They’re losing 3%. They’re not going to be satisfied with 3% in January . You need 6% to stay even with inflation. So, you’re going to be seeing some big labor bumps in the coming months.