Wharton Professor Jeremy Siegel says the SVB collapse could be a good thing - if it 'knocks some reality' into the Fed to pause rate hikes

• The SVB crash could be good for markets if it forces the Fed to pause rate hikes, Jeremy Siegel said.
• The economist has blasted central bankers over rate hikes, which he says raise the odds of recession.
• SVB's implosion is a consequence of rising interest rates, and the Fed needs to take it as a wake up call, he said.

The Silicon Valley Bank implosion could actually be a good thing for markets – if Federal Reserve officials take the bank's failure as a wake up call and finally pause their interest rate hikes, according to Wharton professor Jeremy Siegel.

"I hope that this knocks some reality into the Fed and chairman Powell," Siegel said in an interview on CNBC on Tuesday, referring to the SVB collapse in relation to the Fed's aggressive interest rate hikes to control inflation. Central bankers have raised interest rates 1,700% over the last year, a level that Siegel has warned could push the economy into a recession.

The collapse of Silicon Valley Bank has been a consequence of that policy move, Siegel said. The tech-focused bank has roiled markets in the past week since reporting a $1.2 billion loss on its bond portfolio, thanks to aggressive rate hikes that have raised bond yields while pushing down prices.

The loss led the bank's stock to plunge 60% in a single day before it was shuttered by regulators and taken over by the FDIC. 

The implosion also highlighted how rate hikes have raised odds of recession, Siegel said, pointing to the inverted Treasury yield curve, which occurs when short-term interest rates surpass longer-term rates. The surge in short-term rates is partly behind SVB's crash, he said, and the inversion itself is a notorious signal of an coming downturn.

"There's a reason every recession in the last fifty years has followed an inversion. Something blows up, something goes wrong," he added. "I think those realities are seeping in – I hope they're seeping in to the Fed."

Markets have significantly raised the odds of a softer rate hike or even a pause at the Fed's next policy meeting, with investors pricing in a 75% chance the central bank raises rates by 25 basis-points, according to the CME FedWatch tool.

"I think this ultimately could be good, if you look at the futures market right now, they're saying one and done, and then a decline," he added.

Though Siegel believed Fed officials should pause interest rates – and has urged central bankers to do so for months – he said a 25 basis-point rate hike was the most likely possibility next week, as central bankers are looking to ease up on monetary tightening efforts without alarming markets.

A sudden pause in rate hikes could signal the Fed believes the banking system is in crisis, which could spark more volatility in markets and cause stocks to fall.