Fed has to be ‘far more aggressive…than the Street thinks,’ says academic who called Dow 20,000: ‘This is too much money chasing too few goods’

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Jeremy Siegel, a professor of finance at the University of Pennsylvania’s Wharton School of Business, sounded optimistic about the equity market on Wednesday, even as he acknowledged that inflation is likely to be more damaging than Wall Street has expected. , which could lead to a Federal Reserve headache.

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“Everything is pointing upwards. Everything is moving up … and the Fed,” Siegel said in an interview with CNBC Wednesday afternoon. He speculated that the increase in inflation would make the Fed “much more aggressive than the Street thought.” “It could be the cause.

Rex Nutting: Why interest rates really aren’t the right tool for controlling inflation

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The professor’s remarks came as Wednesday’s significant inflation data showed consumer price gains pushed the year-on-year rate up to 7%, a nearly 40-year high.

The academic said that in his estimate the problem with inflation was, perhaps, more fatal than the supply-chain bottleneck that resulted from the COVID pandemic, but one rooted in demand and easy money.

“This is a demand problem,” said the professor. “It’s too much money chasing too little merchandise,” he said.

Deutsche Bank’s DB,
-0.92%
Economists expect four hikes in 2022 starting in March, while Goldman Sachs Group Inc. GS economists have raised their forecast for a 2022 rate hike from three to four.

Still, Siegel’s remarks imply that more rate hikes may be needed to beat inflation.

He is not alone in this thought either.

JPMorgan Chase & Co. JPM CEO Jamie Dimon said during a CNBC interview Monday afternoon that market estimates for three rate hikes would be “too easy” for the economy (and the market) to absorb. But he said he expected the central bank to aim to do more.

Given Wall Street’s return to growth, a bigger question arises: What’s the ‘right size’ for the Federal Reserve’s balance sheet?

Meanwhile, Siegel said there is no so-called TINA, or an option (for the stock). Trading when bonds take a hit will strengthen the equity market.

“Stocks are real assets, you can’t just hold paper assets that are bonds,” Siegel said. The 10-year Treasury note yielded 1.73% on Wednesday, hovering around its highest level since March of 2021.

East: Jeremy Siegel says stocks could ‘more than compensate’ even if inflation rises 20% over next 2 to 3 years

On Wednesday, however, equities struggled for direction, with the Dow Jones Industrial Average DJIA
+0.02%,
s&p 500 index spx,
+0.27%
and Nasdaq Composite Index Comp,
+0.33%
are fighting to stay above the flatline as investors assess the prospects for the markets and the economy and adjust their portfolios, taking on rate-sensitive high-flying names and those with high-inflation and interest-rate Can perform better in the environment.

“Higher real rates mean the rotation is complete,” said the Wharton professor, referring to value-oriented trades compared to growth stocks, which have been winners over the past several years.

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