'A very steep recession' is guaranteed if the Fed continues with its hawkish interest rate hikes in 2023, Wharton professor Jeremy Siegel says

• A recession is guaranteed in 2023 if the Fed goes forward with more interest rate hikes, according to Jeremy Siegel.
• Siegel said the Fed is "slamming on the brakes way too hard" as it tightens monetary conditions.
• "The talk of going higher and staying high through 2023 I think would guarantee a very steep recession," Siegel said. 

Wharton professor Jeremy Siegel is not happy with how hawkish the Federal Reserve has been even as inflation shows signs of easing, and that dynamic is setting the economy up for a big dip in 2023, Siegel said in an interview with CNBC on Friday.

Siegel believes the Fed continuing to telegraph that it's solely focused on quelling inflation via higher for longer interest rates next year means the economy is guaranteed to enter a recession next year.

"The talk of going higher and staying high through 2023 I think would guarantee a very steep recession," Siegel said. "I think the Fed is making a terrible mistake. Their dot plot is way too tight. Inflation is basically over despite the way Powell characterizes it. And with the bulk of monetary policy yet to be felt, I see no reason to go any higher than we are now."

At the Fed's FOMC meeting on Wednesday, Powell released a dot-plot that showed the Fed expects the Federal Funds rate to end 2023 at 5.1%, compared to about 4.38% today. That suggests the Fed will like interest rates three times next year via 25-basis point rate hikes, whereas the market currently expects two 25-basis point rate hikes next year.

One factor that doesn't sit well with Siegel is the fact that the Fed seems overly focused on crushing wage inflation as it undergoes a structural supply issue due to many people leaving the workforce during the pandemic and a reduction in immigration over the past few years.

"It is not the Fed's job to supress the economy because there is a structural supply shift [in labor]. They take care of aggregate demand, not shifts in supply," Siegel said. And even then, recent wage gains haven't kept up with the rate of inflation, according to Siegel.

"Wages since the pandemic have not matched the increase in prices. The real worker wages have gone down. It's hard for me to see they're pushing inflation up when they don't even match inflation," Siegel said.

It's important to note that the Fed isn't tightening monetary conditions solely through interest rate hikes, but also via the $95 billion per month reduction of its $8.6 trillion balance sheet. And that's driving a complete halt in the growth rate of M2 money supply, which is an indicator Siegel follows to forecast inflation and monitor liquidity conditions.

"Another thing that worries me... is the money supply. If you take a look at what's happened to the money supply, since March [it's] the biggest decline since World War II, the tightest policy on liquidity that we had in over 85 years," Siegel said. 

"That is just slamming on the brakes way to hard... that's the type of policy that precedes a recession," Siegel concluded.