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Jeremy Siegel

Portfolio > Economy & Markets

Jeremy Siegel Fears Fed 'Falling Behind' on Rate Cuts

By Dinah Wisenberg Brin

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What You Need to Know

  • Data suggest the Federal Reserve funds rate should be 4% or lower, the economist says.
  • Unemployment surpassed the Fed's target and inflation is close, he notes.
  • Siegel wondered why the central bank hasn't moved to cut rates yet given those statistics.

The Federal Reserve’s benchmark interest rate should be around 4%, according to economist Jeremy Siegel, who expressed concern Thursday that the central bank will be too slow in cutting rates, as it was too slow to raise them over two years ago.

The Fed funds rate most recently sat at 5.33%, within the 5.25% to 5.5% range the central bank set in July 2023, part of an aggressive rate-hike initiative started in March 2022 to respond to soaring pandemic-related inflation.

“The Fed is not following its own stated monetary policy. It’s not following any accepted monetary policy. And all the data suggests that the Fed funds should be below at or below 4%,” Siegel, the Wharton School professor, said in a WisdomTree webcast.

“I just am very sensitive to the Fed falling behind, as they dreadfully fell behind on the way up. I just don’t want that to happen on the way down,” he said.

Chair Jerome Powell said after the Fed’s meeting last week that the central bank could cut rates in September, but Siegel said he was concerned that the bankers didn’t make a move then and that Powell indicated they didn’t even discuss making a 50-basis-point drop in September.

“I began to worry that it’s just going to go down way too slow,” the economist said.

(Bloomberg reported Friday that most economists expect to lower rates by 25 basis points next month. When he was asked about the likelihood of a 50-basis-point cut at a news conference last week, Powell responded, “That’s not something we’re thinking about right now.”)

The Fed “has overshot the unemployment target and is only a half a percentage point from the inflation target. Virtually all policy rules dictate a much lower funds rate at 4% or less,” Siegel said.

See: Siegel: New Stock Winners Starting to Emerge 

The Fed believes that a normal labor market features 4.2% unemployment, he added.

“If you’re above it, technically you should loosen,” Siegel said, “because you’re above the long-run target. Well, on (Aug. 2), we blew above 4.2. We went, jumped from 4.1 to 4.3.”

Noting the Fed’s 2% inflation target, Siegel compared that to the core Personal Consumption Expenditures Price Index sitting at 2.5%.

“So we are above target, but not very much,” he said. “We’ve come down from over 8% on PCE inflation to within a half a percent.”

The Fed’s current stance is restrictive, Siegel said, adding, “It’s almost like Chairman Powell wants to see the bottom fall out of the labor market and then they’ll do it.”

In a commentary published Monday on the WisdomTree website, Siegel called for an immediate 75-basis-point rate cut and another 75-basis-point rate cut in September, noting the Fed’s long-term 2.8% Fed funds rate goal and the current unemployment and inflation numbers the bank uses to set the benchmark rate.

“Why hasn’t the Fed lowered its very restricted 5.33% Funds rate at all?” he asked in the post.

On the webcast, he offered that Powell “is not going to do an emergency cut” and that the data doesn’t require scaring people, but the central bank is “unnecessarily tight” now. The Fed’s own data suggest its benchmark interest rate should be within 1% of its 2.8% long-term goal, Siegel said.

Any more weakness in the unemployment rate or lower inflation would open sizable gaps, Siegel said. If the Fed waits until inflation hits 2%, “even Powell himself has admitted that’s too late. I mean, the data to me is very persuasive that you should move more rapidly.”

Prices aren’t going to go back down to pre-pandemic levels, “although a lot of Americans would certainly love to do that. It ain’t gonna happen. The most important thing now is, accept what has happened. Slow inflation to 2%, but don’t squeeze it down to a lower rate,” Siegel said.

The economist said he wanted to ask Powell, “what criteria are you using? If you are so close — 90% on one, overshot on the other — of the two mandates that you have that you haven’t moved one basis point yet in easing credit.”

When the Fed does start cutting rates, it will be particularly helpful to small companies, he suggested, since high short-term rates hit these firms harder than larger businesses.

Photo: Lila Photo for TD Ameritrade Institutional

Dinah Wisenberg Brin

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