The stock market sell-off is beneficial, according to Wharton's Jeremy Siegel, as the cautious Fed provides investors with a "reality check."

• The stock sell-off on Wall Street is beneficial, as the Federal Reserve's warning provides investors with a "reality check."
• "The market was on the brink of a runaway situation, which made investors realize that they would not receive the low interest rates they had hoped for when the Fed began its easing cycle, as stated by Siegel on CNBC's "Squawk Box Asia."

According to Jeremy Siegel, professor emeritus of finance at University of Pennsylvania's Wharton School, the stock sell-off on Wall Street was "healthy" because the Federal Reserve's cautionary projection on future rate cuts provides investors with a "reality check."

At its final meeting of the year, the U.S. Federal Reserve reduced interest rates by 0.25%, bringing its overnight borrowing rate to a target range of 4.25% to 4.5%. However, the Federal Open Market Committee revealed that it is likely to make only two additional rate cuts in 2025, which is fewer than the four cuts previously forecasted in September.

The three major indexes on Wall Street declined due to the revised Fed outlook, as investors had anticipated the central bank to maintain a more aggressive approach in lowering borrowing costs.

"The market had been in almost a runaway situation, and this brought investors to reality that we are not going to get as low interest rates as they were betting on when the Fed started its easing cycle, according to Siegel on CNBC's 'Squawk Box Asia.'"

Siegel stated that the market's overly optimistic outlook did not surprise him, as he predicted the sell-off. He also mentioned that he anticipates the Fed to reduce the number of rate cuts next year, with only one or two reductions.

As the FOMC raised its inflation forecast going forward, there is a possibility of no cuts next year, he stated.

The Fed's projections indicate that officials anticipate the core PCE, which measures personal consumption expenditures excluding food and energy costs, to remain above the central bank's 2% target of 2.5% through 2025.

Some FOMC officials may have considered the inflationary effects of potential tariffs, as President-elect Donald Trump has promised to impose additional tariffs on China, Canada, and Mexico on the first day of his presidency.

According to Siegel, the actual tariffs may not be as large as the market fears, as Trump would likely avoid any pushback from the stock market.

The CME's FedWatch tool indicates that market participants anticipate the Fed to not reduce interest rates until its June meeting, with a 43.7% probability of a 25 basis-point reduction at that time.

Barclays chief U.S. economist, Marc Giannoni, predicted that the Fed will make only two 25-basis-point rate cuts next year, in March and June, while factoring in the impact of tariff increases.

Giannoni anticipates that the FOMC will resume incremental rate cuts in mid-2026, once tariff-led inflation pressures subside.

In November, the US inflation rate increased at a faster annual pace, with the consumer price index showing a 12-month inflation rate of 2.7%. Additionally, the core consumer price index, which excludes volatile food and energy prices, rose 3.3% on a year-on-year basis.

"It is a realization and a surprise to everyone, including the Fed, that despite the high short-term rates relative to inflation, the economy remains as strong as it is," Siegel stated.

Jack McIntyre, portfolio manager at Brandywine Global, stated that the Fed's new monetary policy phase, known as the pause phase, could lead to markets equally pricing a rate hike versus a rate cut if it persists for a longer period.

He stated that financial markets in 2025 would be more volatile due to policy uncertainty.