Wharton School of Business Professor Jeremy Siegel stated that the Federal Reserve needs to consider interest rate cuts earlier than market expectations. He told every day that inflation is basically under control and the threat of impending recession is real.
Wharton School of Business Professor Jeremy Siegel stated on Monday that the Federal Reserve needs to maintain flexibility and consider interest rate cuts earlier than market expectations. This is because, after weak economic data, there is a threat of economic recession looming, and inflation is mostly under control.
He told CNBC, "I think Jay Powell must remain highly vigilant because we have indeed obtained some weak data, especially in terms of ISM, unemployment claims, and last Friday's employment report. The Federal Reserve cannot make mistakes again like it did after waiting too late for a year on inflation. Now, I'm not saying we're going to experience a recession... but he must be very vigilant in facing an economic slowdown
The ISM manufacturing index for October last week was 46.7, far below economists' forecast of 49.0. The latest data also marks the 12th consecutive month of falling below the 50.0 level, indicating a contraction in activity. Meanwhile, the October employment report showed that the economy added 150000 new jobs, lower than the expected 180000. The unemployment rate has also risen to 3.9%.
Siegel believes that even if inflation persists, Powell must consider lowering interest rates next year, as the current economic environment is vastly different from the 1970s, when inflation was a nightmare for the Federal Reserve.
Siegel said, "This is not the 1970s." "I just don't want him to be as slow as he is in terms of inflation. He must remain flexible... He must truly think in both directions because we do face two-way risks now, and the downside risks are clearly greater than a week ago
For Siegel, his warning provided a reliable indication of a recession, which would occur when the unemployment rate rose 50 basis points from a cyclical low. Last week, the unemployment rate rose from a cyclical low of 3.4% in April to 3.9%. This has foreshadowed many future recessions. I don't think so yet, but I don't want the Federal Reserve to be as stubborn as they are on inflation issues, "he said.
Finally, Siegel pointed out that if a recession is imminent before the 2024 elections, the Federal Reserve may face strong political pressure from the Democratic Party.
He ultimately expects the Federal Reserve's next interest rate move to be a rate cut rather than a rate hike, and the rate cut may occur at some point in 2024. I think the Federal Reserve should end. Given the existing data, I think the next step is to cut interest rates, which may be earlier than we imagine, "Siegel said.
According to federal fund futures data, the market currently expects the first rate cut to occur in May 2024, and there may be up to four 25 basis point rate cuts by the end of 2024.
