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.
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."
