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