Wharton professor Jeremy Siegel says the Fed risks sparking a disaster if it hikes rates higher than markets are expecting at its upcoming meeting

• The Fed will spark a disaster if it delivers a bigger rate hike than expected this week, Jeremy Siegel said.
• The top economist said inflation was falling rapidly, and officials needed to soften policy to avoid a recession. 
• "We have to get no more than 25 basis-points. 50 would be I think a disaster," Siegel told CNBC.

The Federal Reserve risks sparking an economic disaster if it hikes rates higher than markets are expecting at its upcoming meeting this week, according to Wharton Professor Jeremy Siegel.

In an interview with CNBC over the weekend, Siegel pointed to the Federal Open Market Committee meeting to take place from January 31-February 1, where Fed officials are expected to announce a 25 basis-point rate increase. Central bankers hiked rates  425-basis-points last year to bring down inflation, but the central bank needs to ease up on those efforts as it risks overdoing it and pushing the economy into a recession, critics say. 

"We have to get no more than 25-basis-points. 50 would be I think a disaster," Siegel warned.

Although headline inflation is still well-above the Fed's 2% target, Siegel previously pointed that that figure may be overstated due to the way certain inputs like home prices lag behind the official statistics. The Fed's rate hikes from last year have also yet to be fully felt in the economy, meaning inflation is likely falling much more rapidly than the Fed is expecting, he said.

Others have argued the Fed needs to stay vigilant on high prices to prevent inflation from rebounding, but the shrunken money supply should prevent that, Siegel said. 

Officials have steadily eased up on more aggressive moves, dropping the latest rate hike down from 75-basis-points to 50-basis-points in December, with expectations of two more rate hikes of 25 basis-points in February and March before pausing. That could potentially jumpstart a major rally in stocks, commentators say, with Fundstrat's Tom Lee predicting at least a 20% gain this year. Siegel has previously predicted a 30% rebound in the S&P 500 in 2023.

"I've never saw so many people so bearish, and I think as I mentioned, when everyone is on one side of the market, the market is going to do the opposite thing," Siegel said. 

But, he noted that if central bankers continued to send hawkish signals at the upcoming FOMC meeting, markets likely "won't take those words very well."