Jeremy Siegel, professor of finance at the University of Pennsylvania’s Wharton School of Business, on Wednesday said that a fresh surge in inflation is making him nervous and warned that accelerating pricing pressures could compel the Federal Reserve to raise interest rates at a faster clip than currently anticipated, which could deliver a correction to equity benchmarks.
The Wharton professor credited with calling Dow 20,000 in 2015 told CNBC during a Wednesday interview that he is “nervous about the trends I see in inflation currently.”
The academic’s comments came as Federal Reserve Chairman Jerome Powell on Wednesday said a bout of high U.S. inflation could be prolonged into early next year because parts and material shortages might be getting worse.
Parts of the financial market are undergoing big price surges, including natural-gas futures which surged 11% on Monday, reaching levels not seen since 2014 amid tight U.S. supplies and strengthening demand across the globe.
“It’s frustrating to see the supply-chain problems not getting better, in fact they are probably getting worse,” Powell said during a virtual forum with other central bank leaders, including those from the European Central Bank. “It’s very difficult to say how big the effects will be in the meantime and how long they will last.”
The rate of inflation in the U.S., using the Fed’s preferred personal-consumption expenditures price index, rose at a 4.2% pace in the 12 months ended in July. That is the fastest increase in 30 years. Inflation is running even hotter based on the better-known consumer-price index, a measure of the average prices paid by consumers for a common basket of goods and services that serves as a barometer of economic health.
Powell and others at the Fed have contended for months that the surge in inflation was “transitory.”
However, that view is starting to shift and investors are starting to factor in more persistent inflation than previously thought, analysts say.
Siegel said the anticipated timeline that the Fed will start tapering in November and end it the middle of 2022, with an eye toward starting to raise interest rates sometime next year, is a fair timetable, but he but fears that the surge in inflation could hasten moves, which would drive yields higher and stocks lower.
On Wednesday, the S&P 500 index ended higher but was still down 3.9% from its Sept. 2 record close, and the Dow Jones Industrial Average was off 3.5% from its Aug. 16 record high, following marginal gains on the session. The technology-laden Nasdaq Composite Index is down 5.6% from its Sept. 7 closing peak after finishing lower on Wednesday.
A correction in an asset is usually defined by market technicians as a fall of at least 10%, but no more than 20%, from a recent peak.
Meanwhile, the benchmark 10-year Treasury note
used to price everything from car loans to mortgages, yielded 1.54%, up from 1.534% on Tuesday. The note is up nearly 10 basis points so far this quarter and up 23.7 basis points in September alone, according data compiled by Dow Jones Market Data.