Aug 8, 2024
Economist Jeremy Siegel has a strong message for the U.S. Federal Reserve.
“I'm calling for a 75 basis-point emergency cut in the Fed funds rate with another 75 basis-point cut indicated for next month at the September meeting, and that's minimum,” Siegel, professor emeritus of finance at Wharton, University of Pennsylvania's business school, said in a recent interview with CNBC.
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During the Federal Open Market Committee's (FOMC) latest meeting in July, members opted to keep the benchmark interest unchanged at 5.25% to 5.5%.
The FOMC statement noted that “inflation has eased over the past year but remains somewhat elevated.”
Inflation, unemployment and interest rates
Siegel challenged the Federal Reserve's decision to stand pat, citing significant progress in the U.S. economy toward its targets.
He specifically pointed out that the economy has recently surpassed the Fed's unemployment target of 4.2%.
“On Friday, we blew across the employment number. We're at 4.3,” he noted.
The latest jobs report revealed an increase in the unemployment rate from 4.1% in June to 4.3% in July, marking the highest level since October 2021.
In July 2024, the U.S. economy saw an addition of 114,000 jobs, a decrease from June's downwardly revised figure of 179,000.
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Regarding inflation, the Fed primarily focuses on the Personal Consumption Expenditures (PCE) price index. According to the latest report, the PCE price index increased by 2.5% in June from a year ago.
Siegel argues that this figure represents significant improvement from the rampant inflation experienced in the summer of 2022. Coupled with the current state of the labor market, he expressed frustration with the Fed's lack of action.
“We've gone down 90% towards the target on the inflation rate. We've overshot the target on employment — those are the two targets explicitly mentioned by the Federal Reserve,” he stated. “How much have we moved the Fed funds rate? Zero. That makes absolutely no sense whatsoever.”
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Bad reactions to come?
While Siegel’s message to the Federal Reserve is clear and assertive, CNBC host Joe Kernen is skeptical about the Fed's responsiveness.
“There's no reason to think, given how long it took to move off of zero… that they're going to take your advice on this,” Kernen told Siegel, asking what the outcome might be if the Fed remains inactive until September.
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Siegel expressed pessimism regarding such a scenario.
“I think the market will react badly, very honestly,” he responded.
Siegel was forthright in his critique of the Federal Reserve’s pace of response to economic shifts in the U.S.
“If they're going to be as slow on the way down as they were on the way up, which, by the way, was the worst policy error in 50 years, then we're not in for a good time with this economy,” he said.
Stocks have already seen significant fluctuations recently. On Monday, Aug. 5, the U.S. stock market experienced a selloff, with the S&P 500 declining by 2.97%, the Dow Jones Industrial Average by 2.60%, and the Nasdaq Composite by 3.43%.
However, all three indices saw a recovery the next day.
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Jing is an investment reporter for MoneyWise. He is an avid advocate of investing for passive income. Despite the ups and downs he’s been through with the markets, Jing believes that you can generate a steadily increasing income stream by investing in high quality companies.
