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