Higher interest rates discourage spending, investing, and hiring, which alleviates upward pressure on prices. Yet they can also lead to total job losses and pushes the economy into a recession.
“I think we’re going to get some negative payroll in the first half, and that is what I think is going to turn the heads of the FOMC,” Siegel said, referring to monthly employment data and the Federal Open Market Committee, which sets the central bank’s benchmark interest rate.
“If they get rid of excess labor, their main argument for the continuing increase, which is the labor market is too tight, disappears,” Siegel continued, referring to the Fed’s rationale for hiking rates in recent months.
If the Fed accepts its rate hikes have cooled the labor market and wider economy, it might decide not to hike any further, and could begin discussing a rate reduction by late spring, Siegel said.
“There is a chance we can avoid the worst of a recession — but that requires the Fed to recognize the disinflationary forces I see everywhere,” he said.
