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Dan Loney: And a pleasure to welcome to our show, as always, Wharton Emeritus Professor of Finance, Jeremy Siegel, who is also chief economist at WisdomTree. Jeremy, will be joining us on the final friday of every month moving forward, to give us his sense of the markets, the economy and more. Jeremy, great to talk to you again.
How are you, sir? I'm fine. Thank you, Dan. So as we are recording this, we're a few days away from the August 1 deadline that President Trump has put out there on raising tariffs on the EU up to 30%. Lot of discussion about that, on the impact that that will have, or could have, if it actually goes forward, on both sides, actually.
Yeah, absolutely. And the impact is negative. I've always believed and still believe that the tariff impact is negative, even though the results on the real economy and inflation so far has not yet been seen. That's because most of what has been sold has been sold out of inventory that was purchased before the tariffs.
Now I'm not saying that the tariffs mean disaster in any way, or even recession, but they do mean a slowdown for economic growth. And you are right. As we're recording this, we don't know what exactly Trump will put on on August 1. My feeling is that all the organizations negotiating in, quote, "good faith," will get an extension, and those who have not yet come to the table will probably get a slapped-on tariff that would then be reduced once they start coming to the table.
We really don't have a lot of full trade announcements to be made. Trump has been promising, you know, those trade announcements for a long time, and they've been precious few. But it does mean that they happen in negotiations. And I think many of them are virtually done, subject to their own government's approval.
I do think it's going to take GDP down from what it would be otherwise. Cut a point, point and a half from GDP over the next year, year and a half, add a point to two points on inflation. That's not disastrous, but it certainly is a negative. It doesn't mean that the stock market can't continue to do well, because there's a lot of other, you know, positive factors in the economy that are offsetting the tariffs.
What do you see as those factors? Because it has been kind of unique to watch the markets over the last few months to see, to a degree, the resiliency that's been there. Yeah. I think a very positive factor, first of all, the tax cuts. They were, many of them, made permanent. There's much more certainty there in terms of what we had before.
Going forward, they are positive for capital formation. And secondly, the AI boom. There's a lot of opportunities for firms. And I think I mentioned this before, that can use AI to offset some of the increased cost of tariffs and offset them. So we may be at the verge of sort of a revolution of productivity where firms are going to really— they have an excuse now for laying people off.
Either you produce, you learn how to use AI to help in the position, or, unfortunately, we don't need you anymore. So that could raise productivity growth. AI has recovered, certainly. You know, it looked like it was down and out in February. I mean, throwing Trump's reversal on Nvidia, in terms of allowing them to sell chips in China, you know, has been certainly positive for Nvidia, but it's also been positive for the entire AI sector and tech sector.
So the tech sector has recovered its steep losses. The rotation that looked like it was happening in the stock market towards those value stocks really sort of reversed. AI is back on top. I'm not giving up hope on those other stocks. They're valued very, very well, but they have to start producing profits and using AI in order to up their margins and increase their earnings.
There's been a growing level of discussion, switching to the Fed, about what we will see with the leadership of the Fed over the next several months. We see Chair Powell has his tenure into 2026, but a lot of discussion around that. What are your thoughts on the work that he has done, and what we need to see moving forward from the Fed and from the leaders of the Fed?
Yeah, now let me say I've been teaching monetary theory and economics for almost a half a century. I know how important the independence of the Fed is. Yet it might be surprising, I actually went on news media last week and said I actually think that Fed— that Chairman Powell should consider resigning.
I got a lot of resistance, of course, and I expected it, but I do not see a win-win for Chairman Powell now. I mean, if the economy goes down, he'll be blamed even more. Trump will remove him. The Senate will be much more sympathetic, saying he didn't lower interest rates, and in fact, could ask the Senate for more powers to restrict the Fed.
Don't forget that the Fed is a creature of Congress and can be modified by Congress at any time. If, on the other hand, the economy booms, you know, Trump will be taking all the credit due to his Great Big Beautiful Bill, his tax cut, his deregulation, and his tariffs. So, I mean, it sort of tails, the Fed and Chairman Powell go down, and heads, hey, they come out even.
Those aren't good odds. He's also going to be, you know, replaced in 10 months anyways. He may— if a successor is named earlier, he becomes a lame duck even—even sooner than that. My preference on the— on the front runners to replace Powell, it would be Kevin Warsh. I'm impressed with him. I always— I have been.
I know Kevin Hassett, by the way, very well. And personally, I don't think he would be as good for the Fed as Warsh. Warsh has been on the Fed and has a tremendous amount of institutional knowledge about the Fed, and I don't agree with everything that— that he said about it, but I agree a lot with what he said of it.
So we're, you know, we have a— we have a good person in the wings. You know, I don't know how— now it looks like any member of the Fed that votes to lower rates is bending to Trump. Let me say the following. I want Trump to own this economy, good or bad. I don't want a scapegoat. I don't want him to have a scapegoat in order to blame— blame the Fed, they didn't lower rates.
That's why things didn't work out. If he named his own person, he can't use the Fed as a blame. Certainly not as effectively. You know, he wants to set the economic agenda. Let him own all the failures and all the successes that his policies entail. Before I let you go, let me quickly ask you about the path on rate cuts and what you think we're going to see play out for the remainder of this year.
Well, it depends completely on the economy. I mean, if Warsh comes in, let's say, or even Hassett, there will be faster rate cuts. I don't think the final position will be much. I think many of the models I look at are talking about Fed funds eventually to 3%. The economy is holding up, to be sure. I do not think it's appropriate for the Fed to tighten when there is tariffs that add to the cost.
That's like tightening because there's a tax increase. That's not what I think is effective. I think they should be looking through the tariffs, and we do see a slowing economy. There's no question, GDP growth is slower, labor growth, market growth is slower, and it looks slower in the second half. So given that it's slower, I think the Fed funds rate should be around 3%.
Now, it's not going to be changing next week, the meeting. And everything else really depends on whether, you know, Chairman Powell hangs on and— but most importantly, do we get slowest in the— in the labor— labor force really seeing that payroll go down near zero or even maybe negative, if the economy slows down sufficiently.
You know, it weren't for state and local increases last month, and that would be— you know, we're talking about the month of June, we actually would have seen almost no growth in the private sector at all in terms of employment. So we haven't seen that slow down. I think the Fed should be reacting to it.
I do not see any recession on the scene, at least at this point. Jeremy, always great to talk with you. We will catch up with you again next month. Thank you very much, Dan. You've got it. Jeremy Siegel, Wharton, Emeritus Professor of Finance and Chief economist at WisdomTree.
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