Jeremy Siegel has cautioned that the US economy’s surprise resiliency may be bad news for stocks and increase the danger of a recession this year.
The US gained 517,000 jobs in January, according to official statistics released Friday, considerably above the 185,000 average nonfarm payrolls projection from analysts polled by Bloomberg. At the same time, the US jobless rate fell to 3.4%, the lowest in more than 50 years.
Siegel, a Wharton School finance professor emeritus, said in a Fox Business interview Friday that the surprising strength of the labour market may lead the Federal Reserve to hold interest rates higher for longer.
In reaction to record inflation, the US central bank has hiked interest rates from almost zero to roughly 5% in the last year. Higher interest rates can slow price rise by making borrowing more expensive and promoting savings over consumption and investing. However, they can also reduce demand and slow economic development.
Furthermore, rate adjustments might take many months to spread across the economy and completely take effect. Siegel warned that if the Fed continues to raise interest rates, it may be setting itself up for disaster.
The impacts of this huge tightness, one of the largest in history, have yet to be felt,” he stated in the interview. “I would prefer that they stop now; I think there’s enough evidence that prices are down, that they could pause and wait and see the course.”
“Continued increases will increase the risk of a recession in the second half of this year,” he added. “Hard to believe given this blowout jobs report that we had Friday, but that can turn around very, very quickly.”
Siegel emphasised that underlying prices had dropped significantly over the last three months. He asked the Fed not to limit wage growth since higher salaries will help fill job shortages, and many workers require greater compensation to keep up with inflation.
The author of “Stocks for the Long Run” also discussed his reaction to the employment news in a Bloomberg interview on Friday.
“Now it looks like the Fed’s pause is less likely,” he said, but he added that subsequent data releases might change the economic picture by the time of the next Fed meeting in late March.
Siegel emphasised that a robust economy might put pressure on the stock market. While it promotes better corporate profits and hence higher stock prices, it may also lead to higher interest rates, damping demand and making equities less appealing in comparison to bonds and savings accounts.