Jeremy Siegel, professor emeritus of finance at the Wharton School of the University of Pennsylvania, said Wall Street’s stock selloff is “healthy” as the Federal Reserve’s cautious forecast of future interest rate cuts gives investors a “reality check.”

At its final meeting of the year, the Federal Reserve cut interest rates by a quarter of a percentage point and raised its federal funds rate to a target range of 4.25% to 4.5%. Meanwhile, the Federal Open Market Committee indicated it would likely cut interest rates just two more times in 2025, fewer than the four cuts announced in its September forecast.

All three major Wall Street indexes fell in response to the Fed’s changing outlook, as investors bet the central bank would cut borrowing costs more aggressively.

“The market was almost in an out-of-control situation … and this gave them the realization that we’re just not going to get interest rates as low” as investors had bet when the Fed began its easing cycle, Siegel told CNBC’s “Squawk Box Asia.”

“The market has been too optimistic … so the selloff doesn’t surprise me,” Siegel said, adding that he expects the Fed to scale back the number of rate cuts next year, with just one or two cuts.

There’s also “a chance there won’t be a cut next year,” he said, as the FOMC has raised its inflation forecast going forward.

The new Fed’s forecasts show that officials expect the price index of personal consumption expenditures (excluding food and energy costs, core PCE) to remain at 2.5% through 2025, still well above the 2% target the central bank lies.

Siegel suggested that some FOMC officials may have taken into account the inflationary impact of potential tariffs. President-elect Donald Trump has promised to impose additional tariffs against China, Canada and Mexico on the first day of his presidency.

But the actual tariffs may not be “nearly as high as the market fears,” Siegel said, as Trump would likely try to avoid any resistance from the stock market.

Market participants now expect the Fed will not cut rates until its June meeting, pricing in a 43.7 percent chance of a 25 basis point cut at that point, according to the CME’s FedWatch tool.

Marc Giannoni, Barclays chief U.S. economist, stuck to the bank’s baseline forecast that the Fed will make just two 25 basis point interest rate cuts next year, in March and June, fully taking into account the impact of tariff increases.

Giannoni said he expects the FOMC to resume gradual rate cuts around mid-2026 after inflationary pressures from tariffs ease.

Data released earlier this week showed that U.S. inflation rose at a faster annual pace in November, with the consumer price index showing a 12-month inflation rate of 2.7%, after rising 0.3% for the month. Excluding volatile food and energy prices, the core consumer price index rose 3.3% year-on-year in November.

“It is a realization and a surprise to everyone, including the Fed, that the economy can remain as strong as it is given high short-term interest rates relative to inflation,” Siegel added.

The Fed has entered a new phase of monetary policy – the pause phase, said Jack McIntyre, portfolio manager at Brandywine Global, adding: “The longer it lasts, the more likely it becomes that markets will have to evaluate a rate hike and a rate cut equally. “.”

“Political uncertainty will lead to more volatile financial markets in 2025,” he added.