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Three rate cuts coming and small caps could be the biggest winners. Wharton's Jeremy Seagull calls Powell's Jackson Hole tone very dovish and lays out his rate path and equity playbook. Watch till the end for Seagull's overlooked inflation signal that could unlock even lower rates. First of all, I thought it was very doubbish and I think the market reaction is is perfectly right.
Uh listen, a small stocks doing so well is textbook. As small companies borrow at the Fed rate, at the Fed funds plus one, plus two, they are very sensitive to those short-term rates, which now we're going to go down. I wouldn't be surprised to see it 25 basis point at each of the next three meetings um down to the low 3s by the beginning of next year.
I I think it's appropriate. Uh, I've been saying that for quite a while on CNBC that the short rate should be about 100 basis points below the long rate and that does put it in the the low 3s and um I'm not surprised at the reaction and I I think this means more upside for for equities. Um I guess the question is I mean you say you thought it that pal was more dovish than maybe we were led to believe he would be.
A lot of folks felt like he would not want to close off various options, right? You have Morgan Stanley, Bank of America, a lot of these big firms do not have a forecast for rate cuts this year, which says to me that there is a a relatively robust counter case to the idea that we should be cutting right now.
I mean, I realize it's at inflection points, you're going to get this disagreement. Um but the idea that Powell is perhaps going to tolerate, you know, cosmetically high headline inflation numbers uh for the next few months, uh you think the market can continue to be good with that even if let's say long rates were to leak higher?
Well, first of all, the Fed never forecloses anything for sure. um it always does leave that option open, but it's the first time I really heard him say that the tariffs are a onetime increase and implying that as long as that doesn't spread to other sectors just, you know, as as Steve mentioned that we should not be looking at that inflation and uh saying that that's one reason to tighten credit.
I've often said, you know, tariffs are like a tax increase. Monetary policy says you should not tighten credit when increased prices is caused by a tax increase. And it seems like pretty much he was on board with that notion. He hasn't seen inflationary expectations uh go up. Um you know my belief is that you know the inflation data um in the future may not be as important particularly if it comes from core goods and from tariffs and imports.
He'll be looking at the service side of it. And by the way we know housing is a big part of that service side and that's been very soft. we see that the prices on on in homes across the country are finally softened to the point of going down I think in a majority of states right now. So housing even though it does get in a lag in the CPI and the PC deflator doesn't seem like that big component is going to be a core a source of that service inflation.
So, I think that, you know, pretty much that opens the door for those lower rates and um uh I I think that's pretty much the way it should be and um I mean obviously anything can happen, but uh uh the market wanted it and they got it and it was it was more clear than I thought uh he would be u like he was a year ago.
The pivot a year ago, we saw a rate now. I don't know if it's going to be 50. I think 50 depends pretty much on what the uh August payrolls are going to be. If we got a negative print, it might be 50, but I think that 25 is certainly in a bag bar barring, you know, some sort of crisis we we don't foresee at the present time.
Yeah, that seems like the safe assumption. And I guess the other element of of why we're seeing this spring-loaded market response, aside from it being a somewhat more clear message about uh the likely rate cut, is the setup, right? We spent, you know, several days with the leadership parts of this market selling off, rotating around a little bit of uh perhaps a reason to rethink things like the AI trade and and whether in fact uh policy was going to remain as uh as restricted as it is right now.
So, how do you think the stock market continues to digest this in terms of what parts of the market do better? Yeah. And and by the way, you know, when when we got those PMIs from, you know, S&P Global that surprised on the upside, I think a lot of people said, whoa, how does have some ammonation to say things are not falling apart.
I'm going to be data dependent. That did not deter him. I think that that that was that put a little bit more question. I think coming into the week, we thought, yeah, he's he's he's going to pivot. And some of the data actually was not that weak. We do not see the economy falling apart. We don't see crazy strength by any means.
Uh you know I think that uh you know Goldman Sachs and others uh uh think 1 and a half to 2%. I think the Atlanta Fed thinks 2 and a half two two and a half% for this third quarter. That's not a runaway economy. Uh and with the uh uh supply of labor being restricted so much by immigration and other policies, as pal mentioned, any demunition in demand is going to result in negative payrolls and and rising unemployment. Yeah.
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