According to eminent Wharton Business School professor Jeremy Siegel, Federal Reserve Chair Jerome Powell owes the American people an “apology” for his poor handling of monetary policy over the last couple of years.
In an interview with CNBC on Monday, Siegel purported that the central bank is now behaving too aggressively to combat inflation and will negatively affect U.S. workers during this tightening cycle.
Because the Fed is focusing too much on lagged inflation data and is “talking way too tough,” Siegel thinks that the central bank should instead turn its focus on preventing a recession.
“Chairman Powell talked quite a bit about JOLTS data—the job opening and labor turnover data. How tight it is. Interesting thing, I look back a year ago September, it was exactly as tight as it is today. And he never said anything about inflation. What’s caused him to change his mind? It’s the same data,” Siegel said.
While Powell and his colleagues routinely posit on a tight labor market that is contributing to skyrocketing wages, Siegel rejects the premise that higher wages are adding to inflationary pressures. Instead, according to Siegel, worker wages are playing a game of “catch-up” to a surging consumer price index (CPI).
“It seems to me wrong for Powell to say we’re going to crush wage increases, we’re going to crush the worker, when that is not the cause of the inflation. The cause of the inflation was excessive monetary accommodation for the last two years,” Siegel added.
Ultimately, Siegel recommends that Powell give the public an “apology for such poor monetary policy” that he and the institution have pursued over the last few years.
Policy Blunders
Siegel also appeared on CNBC on Sept. 23 to discuss monetary policy, arguing that the last two years have been filled with the worst policy blunders in the organization’s 110-year history.Siegel’s purported that the Fed is turning ultra-hawkish on monetary policy when Powell should have started his tightening campaign when commodities were soaring at a rapid pace. Now that commodity and asset prices are tumbling, the Fed is raising interest rates, and “it makes absolutely no sense to me.”
The Federal Reserve Board, Washington, March 27, 2019. Brendan McDermid/Rueters
“I think the Fed is just way too tight. They’re making exactly the same mistake on the other side that they made a year ago,” he added. “It’s like a pendulum. They were way too easy, as I’ve told you and many others, through 2020, 2021. And now, ‘Oh my God, we’re going to be real tough guys until we crush the economy.’ ‘Poor monetary policy’ would be an understatement.”
Siegel’s comments went viral, gaining the attention of Tesla Motors CEO Elon Musk, who tweeted over the weekend that “Siegel is obviously correct.”
Overtightening Fears
Now that it is almost guaranteed that the Fed will keep pulling the trigger on rate hikes and leaving the federal funds rate higher for longer, there is general consternation on Wall Street surrounding overtightening by the central bank.Jeff Gundlach, the DoubleLine CEO and so-called Bond King, recently said on a podcast that the Federal Reserve is possibly overtightening monetary policy, adding that the central bank “is getting aggressive to the point that they oversteer the economy into the dumpster.”
Last week, David Rosenberg, the chief economist at Rosenberg Research, told CNBC that the Fed should consider hitting the pause button on rate hikes and assess how the current cycle is impacting the broader economy.
“We’re talking incessantly about inflation, but the economy is flat on its back right now,” he said. “They’re raising rates and reducing the size of the balance sheet in a rather dramatic fashion into an inverted yield curve. And that is going to sow the seeds of a recession, if we’re not already in one.”
Despite widespread concerns about a broader economic downturn, Atlanta Fed Bank President Raphael Bostic explained to CBS’ “Face the Nation” that he thinks there is a good chance to return the target inflation rate to 2 percent without killing the economy.
“I do think that we’re going to do all that we can at the Federal Reserve to avoid deep, deep pain,” he said.
Boston Fed President Susan Collins echoed the same sentiment, telling a local chamber of commerce in Boston on Monday that a sharp downturn is not inevitable.
“I do anticipate that accomplishing price stability will require slower employment growth and a somewhat higher unemployment rate,” Collins noted, repeating her colleagues’ position that she will wait until there are “clear and convincing signs” of falling inflation to advocate hitting the brakes on rate hikes.
According to the CME FedWatch Tool, most of the market is penciling in a 75-basis-point increase at the November Federal Open Market Committee (FOMC) policy meeting.
