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Professor Jeremy Siegel from the Wharton School of Business. He is joining us now. Professor, it's nice to see you again . What are your thoughts as we watch the Dow Jones Industrial Average break through its June lows, and perhaps other major indexes find themselves in a similarly precarious position in the coming days?
Yes, definitely. You know, Scott, it's funny to me to think back to the September meeting a year ago, when commodity prices were skyrocketing and home prices were rising at the fastest pace in postwar history. When all commodity prices were rising at a furious pace, Fed Chairman Powell and the Fed itself were claiming that they saw no inflation.
They said they see no need to raise interest rates in 2022. And now, with all those same goods and assets becoming cheaper, he sees stubborn inflation that requires the Fed to maintain tight policy throughout 2023. To me, this is completely absurd. Too harsh. We don't need to get close to that level to stop inflation, because it has effectively already stopped.
She practically stopped . I mean, the headline came in 3 minutes ago . Oil prices have returned to January levels. This was before Russia's invasion of Ukraine. You see what's happening with commodities . Next week we will get the producer price index . It will show no growth or even a decline for the first time in many years.
And this is a lagging indicator. Raw materials, all prices are going down. The only thing that is not going down is salaries. And, by the way, salaries are currently in the catch-up phase. There is no need to argue that they are pushing inflation. They lag behind inflation. Workers are trying to regain at least some of what inflation has eaten away.
I think the Fed is being too harsh. They are making the same mistake, but from a different angle, that they made a year ago. There are people who agree with you that the Fed is overreacting. Yes. But to say Absolutely. but that doesn't change anything in our current situation. If they continue to do this, whether you think it's right or not, what will it mean for the stock market?
Well, until he comes to his senses and says, "You know what? I don't think we should be so harsh." Until that happens, the stock market will be under pressure. I mean, this is probably one of the factors that can shed light on the situation. I mean, when you see how much real rates have increased, and the dollar is at its highest in 20 or 30 years.
By the way, next Tuesday we will receive monthly data on the money supply, which will show the largest drop in five months in the post-war period. That is, if he looks at any monetary or financial indicators, he cannot say, "Oh, we have to keep them high." At his press conference, he said: "We need to bring real rates into positive territory." They are already in positive territory for any maturity, for the first time in many years.
We are already there. Um, I mean, I thought that was as uninformative as possible. And no one asked him, you know, any difficult questions. How come we have 3.2 million new workers, while GDP is falling? What, what, what does this mean? What does a record drop in the money supply mean? I mean, what does a crash in commodity prices mean ?
What is this lag in the construction of housing indicators, which account for 40% of core inflation, which, as you know, will affect inflation over the next 12-15 months? Is that what he's looking at? Why is he looking at this? This is an inaccurate representation of what inflation is like in the housing sector.
That is, there were no difficult questions. There were, you know, 50 reporters there. I do n't know. They essentially said, " repeat the statement you made at the beginning ." There are so many things you can ask him about . What is he really looking at? He looks at three-month annual core inflation.
This is a lagging indicator. Well, we all look at the market. I mean, look at what the stock market is doing? He looks at market- oriented data. And that's exactly what the Fed should be looking at. I don't know if I've ever seen you so emotional. You seem very Yes, that's right. I am like that. I'm afraid it's like a pendulum.
They were too soft. As I've told you and many others throughout 2020, 2021, and now, oh my god, we're going to be very tough until we destroy the economy. I mean, to me, it's absolutely... to call it bad monetary policy would be an understatement.
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