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And now we'll invite Professor of Finance at the Wharton School of Business and Senior Economist at WisdomTree, Professor Jeremy Siegel. Professor Siegel, we are very happy to see you here. What do you think about the market's reaction being so strong, both in stocks and bonds, and, you know, especially when I look at this?
I'm looking at massive market coverage. I see movement in cyclical sectors of the market and among lower quality assets. It looks as if we are at the beginning of a cycle, as if we have survived the fear of slowing growth, rather than that we have already reached historical highs. So how do you explain this?
Well, first of all, I think it was very mild, and I think the market reaction is absolutely correct. Listen, the fact that small company stocks are showing such results is a textbook example. Small companies borrow at the Fed rate plus one or two percent. They are very sensitive to these short-term rates, which will now be falling.
I would n't be surprised if the rate is cut by 25 basis points at each of the next three meetings, to a level just above three percent by the beginning of next year. I think that's appropriate. I've been saying on CNBC for a long time that the short-term rate should be about 100 basis points lower than the long-term rate, and that's right around a level just above three percent, so I'm not surprised by the reaction, and I think it means further upside for stocks.
I think the issue is that you're saying that Powell was more lenient than we expected. Many people thought he wouldn't want to close himself off to different options, right? Morgan Stanley, Bank of America, and many other major firms are not forecasting rate cuts this year, which to me means there are pretty strong arguments against us cutting rates right now.
I understand that at critical moments there will always be disagreements. But the idea that Powell might be willing to put up with a slightly higher headline inflation reading over the next few months...Do you think the market could continue to feel good even if, say, long-term rates were to rise a bit?
Well, first of all, the Fed never rules anything out completely. She always leaves that option open. But this is the first time I've actually heard him say that tariffs are a one-time increase, and hint that until this spreads to other sectors, it's just, you know, as Steve mentioned, we shouldn't take this inflation and say that this is a reason to tighten monetary policy.
I have often said that tariffs are like raising taxes. Monetary policy dictates that credit conditions should not be tightened when price increases are caused by tax increases , and he seems to fully support this view. He does not see inflation expectations rising. You know, I'm convinced that inflation data may not be as important in the future, especially if it's driven by staples, tariffs, and imports.
He will focus on the services sector, and by the way, we know that housing is a significant part of that sector, and the situation there is quite mild. We are seeing that housing prices across the country have finally dropped enough to start falling. I think it's in most states now. So , despite the fact that housing has a time lag in the consumer price index and the PCE deflator, it seems that this large component will not become a major source of inflation in the services sector.
So I think this actually paves the way for lower rates. And I think that's exactly how it should be. Of course, anything can happen, but the market wanted it and got it, and it was clearer than I expected compared to a year ago. Turn. Yes. a year ago. We saw the rate, now I don't know if it will be 50.
I think 50 points depends mostly on the employment data for August. If the numbers are negative, maybe it will be 50, but 25 is certainly guaranteed unless some crisis happens, which we are not currently anticipating. Yes, that seems like a safe assumption, and I think another factor in why we're seeing such a strong market reaction, aside from a clearer signal of a possible rate cut, is preparation, right?
We spent a few days watching market leaders sell off, rotate, perhaps there was a reason to rethink things like AI investments, and whether policy would really remain as tight as it is now. So, how do you think the stock market continues to digest this, given which sectors of the market are doing better?
Yes, and by the way, you know, when we got these PMIs from S&P Global that came out higher than expected, I think a lot of people said, "Wow, he's got a point here to say that things aren't falling apart." I'm going to depend on the data." That didn't stop him. I think it raised a few more questions.
I think at the beginning of the week we were thinking, "Yeah, he's going to change course." And some of the data was actually not that weak. We don't see the economy falling apart. We don't see some crazy growth, by any means. You know, I think Goldman Sachs and others are predicting 1.5% to 2%, and the Atlanta Fed seems to be expecting 2% to 2.5% for this third quarter.
That's not a booming economy. And because labor supply is so constrained by immigration and other policies, as Powell pointed out, any reduction in demand is going to lead to job losses and unemployment . Yes.
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