Jeremy Siegel, a prominent finance professor at the Wharton School, has backtracked on his earlier call for an emergency interest rate cut by the Federal Reserve. However, he is still advocating for a rapid and aggressive rate reduction.
What Happened: Siegel retracted his previous suggestion for an immediate 0.75 percentage point rate cut, followed by another in September, in an interview with CNBC.
"I no longer certainly think it's necessary. But I want [Powell] to move down to 4% as fast as possible," Siegel said. "Would it be bad? No. But would it be necessary? No, not at this time."
He now believes that such a drastic measure is not currently necessary, but he still urges the Fed to swiftly lower the rate to 4%.
The Fed’s decision to maintain its key interest rate between 5.25%-5.5% on Jul. 31 was met with criticism, especially after a report the following day showed a spike in weekly jobless claims and a further contraction in the manufacturing sector.
However, more recent data, including a decrease in jobless claims and better-than-expected service sector readings, have seemingly alleviated the urgency for an emergency rate cut.
Siegel’s comments came amid market turmoil over recession fears and concerns about the Fed’s slow response to easing policy, despite a decelerating inflation rate.
Siegel initially advocated for an intermeeting rate cut to shake up the Federal Reserve’s approach, but he now acknowledges that such a drastic measure could lead to instability, which he does not believe is currently warranted. Despite this, he argues that, according to various criteria and monetary rules, interest rates should be below 4%.
Market expectations suggest that the Federal Reserve will implement at least a 0.25 percentage point cut in September, with projections indicating a potential reduction of up to a full percentage point by the end of 2024, according to the report.
Given these conditions, an emergency rate cut is "just not the way Jay Powell does things," said Siegel. "But Jay Powell has done things way too slow, certainly on the way up, and I just want to make sure he doesn't make the same mistakes on the way down."
Why It Matters: The debate over the necessity and timing of a rate cut has been a hot topic in the financial world, with various experts weighing in on the potential impact on the economy. A Benzinga poll showed that 75% of respondents believe that a rate cut could prevent a recession, while another poll indicated that the recent market dip is likely a temporary setback.
Meanwhile, Claudia Sahm, the economist who developed the Sahm Rule, has stated that the U.S. is not currently in a recession. However, she has warned of an increased risk of recession, advocating for potential interest rate cuts by the Federal Reserve.
On the other hand, JPMorgan CEO Jamie Dimon has expressed skepticism about the Fed’s ability to bring inflation down to its 2% target, reiterating his prediction of a looming recession in the U.S. economy.
Amid this, Mohamed El-Erian, the chief economic adviser at Allianz, has cautioned that an inter-meeting rate cut has a high risk of being counterproductive and advised the Fed to postpone a rate cut until September. He also emphasized the significance of the upcoming Jackson Hole symposium for Fed Chair Jerome Powell to regain control of the narrative.
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This story was generated using Benzinga Neuro and edited by Kaustubh Bagalkote
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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