00:00:00
well the Federal Reserve begins its
00:00:02
latest Open Market Committee meeting
00:00:03
today and the question of whether to
00:00:05
raise rates again or to hold off is at
00:00:08
the Forefront of the discussion the
00:00:10
banking failures of the last couple of
00:00:12
weeks have also shown greater concern of
00:00:14
whether the quick Rising rates over the
00:00:16
last year have played a part in those
00:00:18
failures Jeremy Siegel professor
00:00:21
emeritus of Finance at the Wharton
00:00:22
School joins us right now Jeremy great
00:00:25
to talk to you again thanks for your
00:00:26
Insight and your time
00:00:28
thank you Dan happy to be here thank you
00:00:30
and so what's your feeling right now
00:00:32
because there's obviously I think a
00:00:34
little bit more in play than we normally
00:00:36
associate with the FED decision because
00:00:39
of all that's going on in the banking
00:00:41
sector the last two weeks I I mean I
00:00:43
think the failure of uh Silicon Valley
00:00:46
Bank just changed the narrative
00:00:49
uh really dramatically
00:00:52
um you know beforehand it was hike hike
00:00:54
hike only inflation
00:00:57
um and now and you know Dan because I've
00:01:00
warned that I thought the Fed was over
00:01:02
tightening and that an accident uh was
00:01:07
likely to happen and uh you know I
00:01:10
didn't I certainly didn't expect it uh
00:01:13
to come right as a a bank run that was
00:01:16
closed uh faster than any other bank
00:01:19
that I actually remember
00:01:21
um but it did and uh obviously
00:01:26
uh uh ma'am there is Contagion we see
00:01:29
what's going on with First Republic
00:01:32
um uh and Signature Bank close there
00:01:35
there may be some other fall but there's
00:01:38
not going to be a general bank run the
00:01:39
Fed will stand behind them the big the
00:01:42
big problem of course is this gonna this
00:01:45
is gonna tighten lending standards every
00:01:47
Community Bank which does as you know
00:01:49
the you know a tremendous amount of
00:01:52
mortgage and commercial lending is going
00:01:55
to be looking over at shoulder and say
00:01:56
oh my god do you have the credit am I
00:01:58
going to get a regular looking at me
00:01:59
what's my position do I have long-term
00:02:02
bonds that also are selling at a
00:02:04
discount
00:02:05
um you know one of the fallouts of the
00:02:08
inverted term structure and why
00:02:10
inversion has preceded every single uh
00:02:15
recession in the last 60 years is
00:02:18
precisely
00:02:19
um uh something like this you know uh
00:02:21
Banks uh borrow short they lend longer
00:02:24
now obviously
00:02:26
Silicon Valley did it in extremum they
00:02:29
should never have been allowed to do
00:02:30
that right but um when you invert the
00:02:33
term structure you can get these these
00:02:36
sort of uh accidents so there's a lot of
00:02:38
question as to how this all kind of
00:02:40
played out what's your view because I
00:02:43
mean as you said there's a question
00:02:44
about the Federal Reserve and maybe even
00:02:46
more specifically the Stanford
00:02:49
Cisco fed in terms of overseeing what
00:02:52
was going on in that region of the
00:02:54
country there is obviously the component
00:02:55
of having zero percent rates for such a
00:02:57
long period of time and the actions that
00:02:59
were taken that kind of you know in that
00:03:01
bond market that kind of led to this is
00:03:03
it a case where you can kind of point to
00:03:06
one or two things or is it kind of a
00:03:08
combination of all of these components
00:03:10
well you know what I learned and I
00:03:12
didn't know this until I talked to some
00:03:14
you know banking experts since svb uh is
00:03:18
that uh the the fed you know these
00:03:20
famous stress tests that were initiated
00:03:22
after the great financial crisis uh were
00:03:25
done on credit quality and they only
00:03:29
were done on interest rates up to two
00:03:32
percent
00:03:33
uh and obviously went way beyond that
00:03:36
and it shocks me
00:03:39
um uh that uh you know uh with you know
00:03:42
interest rates now for six nine months
00:03:45
way over two percent that no one said
00:03:47
just a minute we haven't tested these
00:03:50
Banks uh for interest rate risk and
00:03:54
that's a I mean that's a failure I think
00:03:56
again from the top down at at the
00:04:01
Federal Reserve and on on the local
00:04:03
scene I mean uh we now get information
00:04:06
for instance that um Silicon Valley Bank
00:04:10
has a lot of warnings there was a New
00:04:12
York Times article today about that uh
00:04:14
and others in San Francisco fed knew
00:04:16
there was mismatched and again they
00:04:19
didn't go in and manage it or think that
00:04:20
that could also be a problem with other
00:04:22
Banks and could cause a systemic problem
00:04:24
through the banking system I I think
00:04:27
this is another black mark on on Jay
00:04:29
Powell as you know he has not been uh my
00:04:32
uh Idol to say the least
00:04:35
for many years but um uh you know this
00:04:39
is a very serious oversight so then what
00:04:42
we've seen with the banking failures
00:04:43
just reinforces that that path that you
00:04:46
have talked about that it's it's time to
00:04:48
stop what the rate increases to shut
00:04:50
them down now and see how everything
00:04:52
kind of reacts absolutely now I you know
00:04:55
if you want to be honest I I you know I
00:04:58
I think I come down on that they're
00:05:01
going to go a quarter point What's going
00:05:03
to be more important whether they go a
00:05:05
quarter or none is the guidance that
00:05:08
they give later and I don't just mean
00:05:10
the Dot Plot I I think uh the the the
00:05:14
tone of the press conference that Powell
00:05:18
runs afterwards because you can be sure
00:05:21
that 99 of the questions are going to be
00:05:23
about banking
00:05:25
um and and and and uh you know I don't
00:05:28
know when these uh these uh these Dot
00:05:30
Plot questions to the to the bank
00:05:33
residents were actually sent out they
00:05:36
may have been either before svb or in
00:05:39
the early stages whether they're all
00:05:41
going to get a chance to revise it or to
00:05:43
think about it seriously
00:05:45
um but I think the tone of what
00:05:48
um uh Powell says afterwards I think I
00:05:51
think he's going to say my feeling is is
00:05:54
that if they do go a quarter that's my
00:05:57
guess but uh it's it's a close one uh
00:05:59
that he he will be saying we can afford
00:06:02
to pause the the inflation data Dan has
00:06:05
been has been coming out fairly good
00:06:07
actually recently as you know producer
00:06:10
prices came in way under uh expectations
00:06:13
um uh we had a little bit of loosening
00:06:15
of the labor market with that February
00:06:17
uh report we had good the University of
00:06:20
Michigan uh inflation expectations
00:06:23
report so we can now say you know we're
00:06:27
getting enough evidence that uh with the
00:06:30
cumulative effect of monetary of policy
00:06:32
we could afford to pause and and weight
00:06:36
developments he will never commit a
00:06:38
pause uh uh you know my uh you know good
00:06:42
because developments can always change
00:06:44
and and I've been uh one that is always
00:06:46
saying if you want to know the truth
00:06:48
they only make their decision probably
00:06:49
five days before actually
00:06:52
um but uh I think that uh he will give
00:06:55
the tenor of a pause uh at this point
00:06:58
and see what direction if the
00:06:59
normalization goes if the inflation goes
00:07:03
down uh you know then they will set the
00:07:05
course I do expect that we will be
00:07:08
lowering the FED funds rate uh through
00:07:10
the second half of this year that was
00:07:12
going to be my next question to you
00:07:14
because that's seemingly in talking with
00:07:15
a couple of other economists is that
00:07:18
that is is starting to become more in
00:07:20
their mindset that if they do raise a
00:07:24
quarter point this point at this time
00:07:25
this may be the last one and we could be
00:07:28
talking about an actual rate decrease
00:07:30
later this year which obviously I think
00:07:33
some people believed that maybe 2023 we
00:07:37
weren't going to see that at all but
00:07:38
obviously that was well before what
00:07:40
we've seen with the last two weeks with
00:07:41
the banks you know Dan I kept on saying
00:07:43
when they kept on saying everyone was it
00:07:45
was uh repeating the Mantra you know uh
00:07:49
higher for longer tighter for longer and
00:07:51
I said hey you guys you don't know what
00:07:53
what's going to happen longer term yeah
00:07:56
and now we don't hear that uh uh we
00:08:00
don't hear that anymore I mean you you
00:08:02
really can change I mean most experts
00:08:04
think the tightening in The Lending
00:08:06
standards and the chill that this
00:08:08
produced is equivalent in itself to two
00:08:11
or three 25 basis point rate hikes so
00:08:14
you know clearly you don't want to pile
00:08:16
on top of that uh and you have to take
00:08:20
that into account I remember at the very
00:08:22
beginning at the end of last year when I
00:08:24
really saw things going downward I said
00:08:27
you know we might have a two handle on
00:08:29
the fit funds rate by the end of this
00:08:30
year everyone was laughing at me and and
00:08:32
by the way the data still the real data
00:08:35
has still shown good strength but um I I
00:08:41
wonder whether you know I really wonder
00:08:43
whether we're going to see the turn just
00:08:45
the chill in the air the caution that
00:08:49
this sort of thing just brings about
00:08:53
um uh to Consumers producers uh and uh
00:09:00
um uh really uh any borrowers does does
00:09:04
UBS Credit Suisse play a role in in that
00:09:08
thought process either short term or
00:09:10
moving forward because of obviously the
00:09:12
connection here in the United States
00:09:14
well I I I I think that what what
00:09:18
happened to UBS credits what is credit
00:09:21
Swiss has had in contrast to Silicon
00:09:24
Valley Credit Swiss has had problems for
00:09:26
years yeah
00:09:28
um and it's been going down down down
00:09:29
and you know everyone was kind of
00:09:31
wondering and this kind of this kind of
00:09:33
Crisis sort of pushed it over absorbing
00:09:36
it into UBS a big bang they didn't wipe
00:09:39
out the shareholders but you know Cheryl
00:09:41
was taking a huge hit it's an
00:09:43
interesting case where shareholders may
00:09:45
have taken only a 99 and I think some of
00:09:48
bondholders are certainly the not not
00:09:50
the senior battles the Lesser about
00:09:51
knows got wiped out 100 which is a rare
00:09:53
a rare sort of a a case
00:09:56
um but if you want to know the truth I I
00:09:58
think of a a big bank I mean that if
00:10:02
that would happen and I don't expect it
00:10:03
to happen in the United States the FED
00:10:05
would do the same thing uh I mean you
00:10:08
know basically with the central banks I
00:10:11
mean certainly there's a difference
00:10:13
um
00:10:13
um and we you know we could talk about
00:10:16
but but they both have the philosophy
00:10:18
you cannot allow a large Bank to fail
00:10:21
you have to merge it in the other and
00:10:23
you have to uh you know you have to
00:10:25
prevent a bank run everyone has learned
00:10:28
the lessons really of the 1930s which of
00:10:31
course produced the the bank support in
00:10:34
the great financial crisis which was
00:10:36
going to turn into the 1930s had not
00:10:39
bold action been taken by Ben Bernanke
00:10:41
at that time
00:10:42
um but they they've they've learned the
00:10:44
lesson that you you can't let this uh uh
00:10:48
fester and then snowball into a crisis
00:10:51
Jeremy as always great to talk with you
00:10:53
thanks very much all the best thank you
00:10:55
Dan thank you uh Jeremy Siegel professor
00:10:58
emeritus of Finance here at the Wharton
00:11:00
School
