The Federal Reserve is likely to change its stance and get tough on inflation, tightening the monetary policy to reign in rising consumer prices that continue to exceed expectations, according to University of Pennsylvania Wharton School finance professor Jeremy Siegel.
If the Fed adopts a hawkish stance, it will hurt stock investors who have enjoyed a strong bull run in recent months, warned Siegel, who is known for his positive market forecasts. An inflation hawk is a policymaker who is predominantly concerned with the potential impact of interest rates as they relate to fiscal policy. Hawks are seen as willing to allow interest rates to rise in order to keep inflation under control.
“Stocks love inflation until the Fed gets serious about it, and they have not been serious about it. We will see,” Siegel said on CNBC. “We’re headed for some trouble … Inflation, in general, is going to be a much bigger problem than the Fed believes.”
The U.S. inflation rate rose more than expected in October by 6.2 percent year-on-year — one of the fastest annual increases since 1990, according to Labor Department data.
Market analysts have predicted for most of 2021 that U.S. markets – stocks, bonds, crypto, real estate and venture capital – are entering a speculative bubble that could burst and cause serious economic pain for Americans and investors globally.
U.S. consumer spending has surged as the economy emerged from the covid-19 lockdown thanks to increased mass vaccinations. This has pushed inflation higher than the 2 percent target set by the Federal Reserve. Inflation hit 5.4 percent in September.
Fed Chairman Jerome Powell has on several occasions downplayed inflation risk on the U.S. economy even as several indicators and prices continue to spike.
Siegel said he believes Powell will feel serious pressure to take a more aggressive policy stance if inflation rises as fast in November as it did in October.
That could mean accelerating the Fed timeline for reducing monthly asset purchases, which is supposed to start later this month or adjusting its thinking on when the first hike from near-zero interest rates might take place.
“There’s going to be pressure on the Fed to accelerate its taper process,” Siegel said. “I do not believe that the market is prepared for an accelerated taper.”
Tapering is the theoretical reversal of quantitative easing, aka money printing policies, which were implemented by the central bank to stimulate economic growth during the early days of the covid-19 pandemic.
Listen to GHOGH with Jamarlin Martin | Episode 74: Jamarlin Martin Jamarlin returns for a new season of the GHOGH podcast to discuss Bitcoin, bubbles, and Biden. He talks about the risk factors for Bitcoin as an investment asset including origin risk, speculative market structure, regulatory, and environment. Are broader financial markets in a massive speculative bubble?