Jeremy Siegel says he's 'shocked' at what the Fed's overlooked and sees stocks struggling over the next 6 months

• Wharton economist Jeremy Siegel says he's shocked the Fed has overlooked the drop in bank lending. 
• Banking chaos and tighter credit could spur a big fall in US economic activity, he told CNBC. 
• He expects stocks to struggle in the next 6 months – and lifted odds of a recession this year. 

Wharton professor Jeremy Siegel says he's amazed the Federal Reserve has overlooked tighter lending standards,  while warning US stocks could struggle over the next six months. 

"What happened to the banking system, and what I see in data on lending falling off the cliff, really portends a much bigger decline in economic activity," the veteran economist said in a CNBC interview Wednesday.  

"I am shocked that no one at the Fed has cited the reduction in lending that has occurred — almost the most in 75 years, actually," Siegel added.

Americans are already feeling the pinch of tighter credit conditions after the failure of Silicon Valley Bank, as banks become more cautious about how much they lend and who they lend to. That's sparked worries that a full-blown credit crunch is coming for the US. 

Some think it could also spell tough times for the economy, given the higher cost of borrowing, the lower access to credit and the chances of a bump in unemployment.

Siegel is pessimistic about US stocks and the economy because the Fed is set on continuing to jack up interest rates despite the turmoil in the banking industry.

"I believe the Fed has already done too much. ... Their trajectory was way too high," he said. 

According to Siegel, any more rate hikes by the Fed could spell pain for US stocks over the next six months and raises the probability of a US recession this year. 

"Even though it might be rough over the next three to six months, unless you're very tactical and very short-term, I'm not a seller," he said, adding that he's still a "very bullish" long-term investor. 

The US central bank has lifted benchmark interest rates from almost zero to upwards of 4.75% over the past 12 months — the steepest jump in US borrowing costs since the 1980s. It's trying to quell persistently high inflation, which hit a 40-year high of 9.1% last summer and remained above the Fed's 2% target at 5% year-over-year in March.

Traders expect the Fed to bring in another 25 basis-point rate hike at its May meeting, fed funds futures show. They also expect its policymakers to begin cutting interest rates in July. 

But Siegel thinks the Fed will cut rates this year lower than those futures signal, once policymakers have seen a slowdown in inflation and economic activity.