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The latest meeting of the leadership of the Federal Reserve ended up with no rate cut, and the benchmark rate staying in a range of 3 1/2 and 3 3/4 percent. That news may be not so much a surprise as was the fact that there were two dissenters to that position, Governor Stephen Miran and Christopher Waller, who both had asked for a quarter point cut.
So what lies ahead for the Fed, the economy and rate cuts? Pleasure to welcome back for our monthly conversation, Jeremy Siegel, Wharton Emeritus Professor of Finance, as well as senior economist at WisdomTree. Hi, Jeremy, how are you? I'm good. Yeah. So Miran was, of course, not a surprise. A little bit of a surprise, Waller.
I mean, now everyone's asking, "Is he asking for a quarter because he still wants to be in the running as Fed Chair? Or does he really feel— I mean, I do not know the man personally. I mean, there is— you know, I believe he's probably thinking that we should be lower. I've said last month that I— that the short-term interest rate should be 100 to 110 basis points under the 10- year.
The 10-year is four and a quarter. That puts it at 3-10. Eventually, as you mentioned right at the onset, it means two more cuts. And eventually, this year. And the market thinks probably not in the last two meetings of Fed Chair Powell, but perhaps mid-year and the fall to get there. But remember, that completely depends on the course of the economy.
I mean, whether it's stronger. So, you know, people quote me probabilities. And I said, "You have a weaker employment report, and boy, those probabilities will change in two seconds." So, you know, the economy is doing well. not quite as well as the St. Louis Fed thinks. because we actually just got, a few minutes ago, the trade report from November, which was a bigger deficit.
That will subtract some. But, I mean, it's not going to be 5%, but I think it could be in the 4% range. Goldman Sachs still thinks fourth quarter is two and a half. But even— even two and a half to three and a half— which is, you know, two points slower than— than St. Louis— is certainly not a bad, at all, performance, you know, given that we had a 46-day government shutdown.
Well, okay. And then there— we now have a possibility of another government. - Yes, we do. - As we're taping this, you know, a couple of days ahead of what this potentially could occur, give us your thoughts on the potential impact of having another government shutdown. Well, again, it depends on how long.
Yeah, this is very unfortunate, again. And no one knows, I mean, you know, how long it is. There was some progress that they said that was made. I didn't check the betting markets. I mean, the betting markets yesterday were 70% we're going to at least have a shutdown for one or two days. That won't be much of a problem.
But again, anything that even approaches what we had before, I think would really cut into first quarter GDP. Let me ask you something. Because Chair Powell, in his comments yesterday, mentioned that he thought it was appropriate to hold right now because of the three cuts that we had just had, and to see how much impact and what they are going to mean for the economy.
When he says that, give us your thoughts on that being kind of the stance of, "Okay, we've done three cuts in a row. Let's just hold for a second— " - Yeah. "— and see how they impact what's going on out there." Well, I mean, you know, the thing is that we've actually— we had a little bit of a strengthening of the labor market.
Unemployment rate had been four-six. It was down to four-four. Jobless claims are in the low range. So we— you know, there was some fear of a big weakening of the labor market, and there hasn't been. So I think that justifies them to hold, in their mind. Inflation, you know, we will— we will see. I mean, we're a little bit, really, getting some commodity inflation here.
Gold, silver, but also some metals. How much that adds is uncertain. The recent decline in the dollar might add a little bit of pressure also, although, on the other side, as we said, the housing inflation still, year over year, on both rentals and prices of homes are virtually flat. So. And that's a big chunk, and should work its way in.
I'm— not at this point, I'm looking at these commodity prices and saying, "Let's keep our eye on them," but I'm still pretty sanguine on the inflation projection for 2026. What are your thoughts about Wall Street in general right now? Because it's been kind of a slow and steady uptake by the three major indices in the last few weeks.
I think the S and P has had two or three record closes, but they've been by an inch or two to get past that. But you've still seen— we haven't seen a strong pullback. And I know you're very wary of, you know, seeing the markets cut at some point. Now I— you know, the thing is, I mean, we got these three speed bumps of January, which I thought were all going to be resolved by now.
I mean, first of all, is there going to be another government shutdown? Who's going to be the Fed Chair? And the SCOTUS. I'm very disappointed that they did not rule yet. And in fact, the earliest ruling now is supposed to be February 20. That gives Trump a free reign to keep on threatening tariffs, one way, or the other.
So those three little bumps are still out there to resolve. But once those are resolved, I mean, 2026 looks good. I mean, earnings look good. I mean, we're getting first quarter earnings— fourth quarter earnings right now. You know, there are ups and downs, but guidance is not bad. And, you know, 2026 should still be a good year of earnings.
The big news, of course, is the broadening of the market. You know, with the small caps doing a tremendous run. And even what we would call the— you know, the non Mag-7 stocks. So the Mag 7 have had their ups and downs, certainly, of that. And I'm not surprised. Is this the long— you know, there were so many head fakes on the broadening of the market in 2025, you're reluctant to say, "Oh, yeah, this is the broadening of the market," when, in fact, it's another head fake.
But I think there's more— there's more threats to AI that could— competitive threats, and coming from all directions. China. With— you know, even companies themselves. Technological breakthroughs— and we can talk about them— that I think could keep the lid on Mag 7 prices this year to allow the rest of the market to outperform.
So when you talk about AI, and I'll finish up on this, there is still so much that is unknown about how this is going to develop, what it's going to mean to the labor force. You know, there are so many components that we just don't know. How, as an economist, do you have to view this period in time with this transformative technology, which is obviously going to have a significant impact, and not really knowing fully what kind of impact it might have?
You know, we hear the— that Amazon's cutting 10, 15,000. UPS is cutting. We see those. But, you know, we're not seeing anything really in terms of the jobless claims. There's also challenger layoffs. They come with a lag. Are we going to see, you know— are we going to see, you know, massive layoffs?
You know, there's an uptick of using AI tools. But Goldman Sachs and others that have been following it, it's a very slow, steady. Which, you know— it could be accelerated by a number of factors. But at this particular point, the use of AI, you know, has— you know, has been a factor keeping productivity high.
Again, we're gonna see great productivity the third quarter. Fourth quarter looks good, although this pre- deficit can bring down GDP. Can it— can the productivity maybe go to three, 4 percent? Then we'll really see the effects. And that's one reason why, you know, the cut down of immigration is a good thing if it's— because AI is not going to create those jobs.
That's going to keep the demand and supply of labor more in balance than we would have seen otherwise. Jeremy, always great to chat. We'll talk to you again next month. Absolutely. Thank you, Dan. You got it. Jeremy Siegel, Wharton Emeritus Professor of Finance and also senior economist at WisdomTree.
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