A 100 basis point rate hike is a “medicine to stop this inflation”

Wharton Jeremy Siegel calls for a 100 basis point rate hikeMarkets may be “close to the bottom,” she says.

A Wharton University of Pennsylvania finance professor told CNBC Wednesday that a 100 basis point Fed rate hike on Wednesday would be “a medicine to stop this inflation.”

“The Fed needs to grab the inflation story…it knows it’s too late,” Siegel said.Squawk Box Asia. “

“[You] You must take your medicine now to recover. If you just leave him, you will have to take more medicine later.”

With the annual inflation rate reaching its highest level in 40 years at 8.6% annual inflation in In May, the prospect of sharp interest rate hikes sent markets reeling amid fears of a global recession.

US stocks fell into bear market territory Earlier this week it sent ripples across global markets.

Jeremy Siegel

David Orwell | CNBC

Siegel said Federal Reserve Chair Jerome Powell could justify such an aggressive move by introducing the expected 50 basis points increase in July, and combining it with the 50 basis points projected for June.

Anything less than a strong move envisioned by the Fed this week It will signal to the markets that there is no inflation under control, Segal said.

“if [Powell] does only 50 [basis points]I think it will be a big disappointment. then [markets] They will say he has no control, he is not going fast enough.”

Markets will go up

If the Fed nip the inflation problem in the bud, A rally is likely in the markets as investors and companies take into account price increases and start lowering earnings expectations.

Instead of panic Chasing sharper rate hikes after delivering that 100 basis point hike, Siegel said, the Fed should wait until it intervenes in the economy. He added that too many aggressive moves could lead to a severe recession.

He added that financial markets, as they are, have already factored into a mild recession of 2023.

“I think you’ll get a rally, and [while] “It is very difficult to pick the exact market bottoms, and I think we are close to the bottom,” Siegel said, adding that the rally would collapse within “hours” of the Fed’s announcement.

The Fed needs to extract the inflation narrative. You need to take your medicine now to recover. If you just leave it on, you will have to take more medicine later.

Jeremy Siegel

Professor of Finance, Wharton

“And that would suggest that we are taking medication to stop this inflation. If we take it sooner, we will be better off later and there will be less possibility of a recession in 2023,” he said.

If the Fed moves aggressively on Wednesday, inflation should subside by the end of the year, and if commodity prices begin to follow stock markets into bearish territory, the US economy is well on its way to reining in inflation, Siegel told CNBC.

But with the US economy ballooning due to stimulus – and if the Fed moves wisely – a major recession could easily be avoided, the professor said.

“There is still a lot of liquidity, unemployment is very low, and a lot of demand,” he said.

Unprecedented explosion of money

Siegel added that excess liquidity and increased demand, mainly driven by government incentives as a result of the pandemic, were responsible for raising prices although supply chain constraints also played a role.

“We have [an] An unprecedented explosion of money.”

In the first half of 2020, when the pandemic was at its peak, a record $2 trillion in cash hit US bank deposit accounts. A reflection of the amount of liquidity flowing into the US economy.

In April 2020 alone, deposits grew by $865 billion, more than the previous record high for a full year.

“This was really the kernel of the demand explosion. We definitely have the Covid problems, we have the Russian invasion, and I understand that,” Siegel said.

“But what the Fed should have done… is to say, [it] He said, “I needed the first stimulus after Covid hit. Then you should have told the government that you have to go to the bond market.. [it] He can’t get a hand from the Fed.”

“Then interest rates will rise much earlier, and we will not have the problem of inflation that we are facing now,” he added.