Saturday, August 13, 2011

Wharton's Siegel: Fed Has Painted Itself Into a Corner

The Federal Reserve has painted itself into a corner when it announced to the world that interest rates will likely stay low for the next two years, says Wharton School finance professor and economist  Jeremy Siegel.

A lot can happen between now and then, and should economic conditions merit a hike in interest rates, markets will be unpleasantly surprised.

“I don’t think the Fed can forecast two years in advance to know that this is going to be the right policy for the next 24 months. Back in March they were optimistic about growth and now we’re five months later and they’re pessimistic,” Siegel tells CNBC. “I’m worried about that long-run credibility”

Jeremy Siegel(Associated Press photo)
Stock markets, meanwhile, have been enduring some wild swings these days but investors will find some bargains when the dust settles, Siegel adds.

“If you can just grit your teeth and say I’m going to get through this volatility, I think you’re really going to be rewarded in the long run here.”

Many bonds, Siegel says, are due for a breather.

TIPS, the government’s inflation-protected securities, are in such demand that investors have been willing to take a loss for them in exchange for a break in market volatility, Siegel says.

“As you saw, the ten-year TIPS, going into a negative yield is just unbelievable. People are giving their money to the U.S. government for ten years and saying in ten years give it back to me worth less than what I am giving you now.”

“My feeling is the bond market is just grossly overvalued.”

The Wilshire 5000 Total Market Index has lost $2.8 trillion in value since the stock market slide began on July 22, CNNMoney reports.

About $600 billion was wiped out on Wednesday, when the index and the Dow Jones Industrial Average both dropped about 520 points.

Experts say investors are wise to jump on the sidelines until financial seas calm.

"Try to take a step back from the day-to-day," says Chris Philips, senior investment analyst with Vanguard, according to CNNMoney.

"Reacting to these ups and downs and sideways swings can actually do more harm than good for most investors."

Analyst say those nearing retirement age should not be too affected by Wall Street’s wild swings.

"For people who are young, it's a buying opportunity," says Christine Benz, director of personal finance for Morningstar, also tells CNNMoney.

Those who need to cash in the next few years should have too much invested in stocks anyway, Benz says.

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