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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 late last week. But this has been a pattern that's gone on for a few days. Great to be joined by Jeremy Siegel, Emeritus Professor of Finance here at the Wharton School.
Jeremy, great to talk to you. And let me get your thoughts in 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 that the Fed is moving way too slow. They should have cut at the last meeting. They have overshot their target on the labor market.
In other words, they said the normal labor market should be 4.2% unemployment. We crossed to 4.3 on Friday. We've reached— we've gotten down to two and a half percent inflation, so still at 90% towards our inflation target. But we've changed nothing on federal funds. They say— don't— the Fed has printed, in their last meeting, 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 other, why have they not moved on the Fed funds rate? Right. - And I think that is what the market is really concerned about, 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.
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 expectation was for a quarter point here. It feels like we're gonna have to go maybe beyond that? 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 basis points in the September meeting.
And by the way, that only, you know, gets us down to 4%, which is, you know, still 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 about how you set the Fed funds rate. They are all 100 to 150 basis points below where we are today.
So you're talking about, in terms of the timing, having a cut even between meetings at this point. - Yes, absolutely. And— 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 have cut in the December meeting and they didn't. And all of a sudden bad data came, they made an inter-meeting cut, and the NASDAQ— at that moment, the futures prices jumped 20% in saying "Oh my goodness, the Fed gets it." The Fed needs to tell the market, "We get it.
Things are not over and we need to reduce the degree of restrictiveness." You know, I mean, I saw Austan Goolsbee also, and he was very careful in head. He didn't want to speak for anything. But he basically said, "Why are we increasing the level of restrictiveness as we're moving towards our target?" Which, of course, a lower inflation means that the real rate is going up at the time that everything else is going down.
We're joined here by Wharton Emeritus Professor Jeremy Siegel. And you— obviously a lot of the conversation we've had over the years really started around being slow to the dance when inflation was actually hitting. And now we've kind of 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 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 emergency cut. The market will welcome it. Get back on track. That— that— I'm not saying we can avoid a correction in the market. I'm not saying we can avoid a slowdown in the economy.
I would say we could avoid a recession if they reacted quickly. But it would make things better if they move closer to their own stated neutral rate at this time. 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 markets and not a negative where you know, some people would potentially view it as, okay what's wrong with the economy?
Maybe even more than— than maybe we're thinking. I mean, No. Because— well, there's two things. First of all, the Fed hasn't been very good at predicting about the economy, like they have special knowledge. So in a way, I think the market has much more knowledge of what's going on in the economy. And second, I'm just taking from historical experience.
As I said, when they missed cutting in the December 1999 meeting and did an emergency cut in January, it helped the market. Now, it is true that the market, because of recession, continued to go down. But it was a very mild recession. I argued it would have been worse had the Fed not lowered rates. I'm not saying that it could prevent the market from going down further.
I can say it can prevent it from going down much worse. - Right. 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. 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 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 faster. He has to learn to move faster. Would even a quarter of a point at the last meeting had 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 bump on the road?
- Well, it would have— if he would have gone a quarter point, which was against expectations, it would have shown he's very flexible. And I was very disturbed at the meeting when someone asked him, "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.
Not only is it not off the table, the market is predicting at least 25 basis points right now. - Yeah. So I mean, again, it's the overdeliberateness of Powell, and just going slow, slow, slow, that they're worried about. By going 25, that's not much. It would have shown flexibility. By not going— taking 50 off the table, the— unfortunately, the market is worried about the worst.
So let me finish up with this. And it's something you just kind of alluded to, is kind of that connection between the markets and what we're seeing there, and the reaction to the Fed, and how really, the markets can provide even a little bit of the economic information that the Fed is really going off of, to understand the path that they should take.
Yeah. You know, absolutely. I mean, I'm just not— you know, people say, "Oh, 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 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 a 1987, where, you know, we cut where we didn't have a recession. No, it was a very different circumstance like that. And I'm looking at that real data. And I was pretty shocked at the deterioration that I saw both on Thursday with the ISM data and on Friday with the employment data. All right, Jeremy.
Great to talk with you. Thanks very much. - Thank you. Jeremy Siegel, Wharton Emeritus Professor of Finance.
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