00:00:00
Dan Loney: Well, as we mentioned at the top
00:00:01
of the show, we are seeing a
00:00:02
pretty big sell off today, to a
degree worse than what we saw
00:00:07
late last week. But this has
been a pattern that's gone on
00:00:10
for a few days. Great to be
joined by Jeremy Siegel,
00:00:13
Emeritus Professor of Finance
here at the Wharton School.
00:00:16
Jeremy, great to talk to you.
And let me get your thoughts in
00:00:18
general on what we've been
00:00:20
seeing the last couple of
sessions.
00:00:22
Well, it is a big deterioration
in the jobs picture. And a fear
00:00:30
that the Fed is moving way too
slow. They should have cut at
00:00:34
the last meeting. They have
overshot their target on the
00:00:41
labor market. In other words,
they said the normal labor
00:00:45
market should be 4.2%
unemployment. We crossed to 4.3
00:00:51
on Friday. We've reached— we've
gotten down to two and a half
00:00:56
percent inflation, so still
at 90% towards our inflation
00:00:59
target. But we've changed
nothing on federal funds.
00:01:06
They say— don't— the Fed has
printed, in their last meeting,
00:01:10
that the normal Fed funds rate
should be 2.8%. So given that
00:01:17
they've overshot on one of their
two targets, almost there on the
00:01:21
other, why have they not moved
on the Fed funds rate?
00:01:25
Right. - And I think that is what the
market is really concerned about,
00:01:30
that they are going to be as
slow and tardy going down as
00:01:37
we all know they were three
years ago on the way up.
00:01:43
So does this mean we're going to
have to see a larger cut than
00:01:46
maybe we thought we would see?
I mean, a lot of the— the
00:01:50
expectation was for a quarter
point here. It feels like we're
00:01:55
gonna have to go maybe
beyond that?
00:01:56
Way beyond that. I mean, I was—
I was extreme
00:01:59
when I was on, you know,
00:02:02
CNBC. I said 75 basis points,
immediately, and another 75
00:02:08
basis points in the September
meeting. And by the way, that
00:02:13
only, you know, gets us down to
4%, which is, you know, still
00:02:17
way over the normal Fed funds
rate. If you take a look at all
00:02:24
rules, like the famous Taylor
rule, and you can go on and on
00:02:29
about how you set the Fed funds
rate. They are all 100 to 150
00:02:34
basis points below where
we are today.
00:02:38
So you're talking about, in terms
of the timing, having a cut even
00:02:43
between meetings at this point.
- Yes, absolutely. And—
00:02:46
and I bring you back. I mean, I
remember, I was in my office at
00:02:51
Wharton in January of 2000,
when everyone said they should
00:02:56
have cut in the December
meeting and they didn't. And all
00:02:58
of a sudden bad data came, they
made an inter-meeting cut,
00:03:03
and the NASDAQ— at that moment,
the futures prices jumped 20%
00:03:10
in saying "Oh my goodness, the
Fed gets it." The Fed needs to
00:03:14
tell the market, "We get it.
Things are not over and we need
00:03:19
to reduce the degree of
restrictiveness." You know, I
00:03:23
mean, I saw Austan Goolsbee
also, and he was very careful in
00:03:29
head. He didn't want to speak
for anything. But he basically
00:03:33
said, "Why are we increasing the
level of restrictiveness as
00:03:36
we're moving towards our target?"
Which, of course, a lower
00:03:40
inflation means that the real
rate is going up at the time
00:03:46
that everything else is going
down.
00:03:49
We're joined here by Wharton
Emeritus Professor Jeremy
00:03:52
Siegel. And you— obviously a lot
of the conversation we've had
00:03:57
over the years really started
around being slow to the dance
00:04:00
when inflation was actually
hitting. And now we've kind of
00:04:04
come full circle to a degree,
haven't we?
00:04:06
Yeah, that's what the market is. We're
exactly that, too slow on the way
00:04:10
up, and they're worried about
too slow on the way down. He—
00:04:14
Jay Powell has to learn the
lesson. It's not wrong to do an
00:04:18
emergency cut. The market will
welcome it. Get back on track.
00:04:24
That— that— I'm not saying we can
avoid a correction in the
00:04:29
market. I'm not saying we can
avoid a slowdown in the economy.
00:04:33
I would say we could avoid a
recession if they reacted
00:04:36
quickly. But it would make
things better if they move
00:04:41
closer to their own stated
neutral rate at this time.
00:04:46
And so you believe that if they did
make a move
00:04:49
of, like, 75 basis
00:04:50
points immediately, that we would
see a positive momentum on the
00:04:54
markets and not a negative where
you know, some people would
00:04:58
potentially view it as, okay
what's wrong with the economy?
00:05:01
Maybe even more than—
than maybe we're thinking.
00:05:03
I mean, No. Because—
00:05:04
well, there's two things.
First of all, the Fed
00:05:06
hasn't been very good at
predicting about the economy,
00:05:09
like they have special
knowledge. So in a way, I think
00:05:13
the market has much more
knowledge of what's going on in
00:05:16
the economy. And second, I'm
just taking from historical
00:05:19
experience. As I said, when they
missed cutting in the December
00:05:23
1999 meeting and did an
emergency cut in January, it
00:05:29
helped the market. Now, it is
true that the market, because of
00:05:33
recession, continued to go down.
But it was a very mild
00:05:37
recession. I argued it would
have been worse had the Fed not
00:05:40
lowered rates. I'm not saying
that it could prevent the market
00:05:45
from going down further. I can
say it can prevent it from going
00:05:48
down much worse.
- Right.
00:05:51
And so at least at this
point, we may be getting closer
00:05:55
to a correction, but at least
we're not falling off the cliff.
00:05:58
Yeah.
00:05:59
I mean, it would welcome, they
will say, the Fed is is able to
00:06:03
react more quickly. Jay Powell is
just far too deliberate. He has
00:06:07
to tee it up at one meeting, and
then go a quarter point and then—
00:06:11
this is not the way the
economy works. It goes much
00:06:14
faster. He has to learn
to move faster.
00:06:17
Would even a quarter of a
point at the last meeting had
00:06:21
been effective, even with the
the labor numbers that came out?
00:06:24
Or would it have just kind of,
you know, been a little bit of a
00:06:27
bump on the road?
- Well, it would have—
00:06:30
if he would have gone a quarter
point, which was against
00:06:32
expectations, it would have
shown he's very flexible.
00:06:37
And I was very disturbed at the
meeting when someone asked him,
00:06:40
"Are you thinking of 25 basis
points in September?" And he said,
00:06:44
"Oh, no, that's off the table." I
don't know why he said that.
00:06:49
Not only is it not off the
table, the market is predicting
00:06:52
at least 25 basis points right
now. - Yeah.
00:06:56
So I mean, again,
00:06:57
it's the overdeliberateness
of Powell, and just
00:07:01
going slow, slow, slow, that
they're worried about. By going
00:07:05
25, that's not much. It would have
shown flexibility. By not going—
00:07:10
taking 50 off the table, the—
unfortunately, the market is
00:07:16
worried about the worst.
00:07:18
So let me finish up with this. And
it's something you just kind of
00:07:21
alluded to, is kind of that
connection between the markets
00:07:25
and what we're seeing there, and
the reaction to the Fed, and how
00:07:29
really, the markets can provide
even a little bit of the
00:07:33
economic information that
the Fed is really going off of,
00:07:37
to understand the path that they
should take.
00:07:39
Yeah. You know, absolutely.
00:07:41
I mean, I'm just not—
you know, people say, "Oh,
00:07:43
the market has overreacted. It's had
bear markets without recession.
00:07:46
That's true. But I'm also
looking at the real data. And I
00:07:49
don't like the real data. - Right.
00:07:51
So I mean, we got more than
00:07:53
just, you know, a— you know, a
sudden bear market. This is not
00:07:56
a 1987, where, you know, we cut
where we didn't have a
00:07:59
recession. No, it was a very
different circumstance like
00:08:02
that. And I'm looking at that
real data. And I was pretty
00:08:08
shocked at the deterioration
that I saw both on Thursday with
00:08:12
the ISM data and on Friday with
the employment data.
00:08:16
All right, Jeremy. Great to talk
with you. Thanks
00:08:18
very much. - Thank you.
00:08:19
Jeremy Siegel, Wharton Emeritus
Professor of Finance.
