The U.S. Federal Reserve has been too slow to cut interest rates and should now do so aggressively to reverse the policy mistake it made a year ago, economist Jeremy Siegel says.
In an interview with BNN Bloomberg on Wednesday, Siegel, a professor emeritus of finance at the Wharton School of Business and current senior economist at WisdomTree, said the Federal Reserve is in danger of making another policy mistake by being too cautious.
“The Fed funds rate is far too high and I do not want the Fed to repeat the policy mistake it made three years ago of being way, way too late in raising rates,” Siegel said.
Siegel said he is not among those who think the U.S. is falling into a recession but added that the Fed’s reluctance to cut rates even as the unemployment rate of 4.3 per cent is now just above their 4.2 per cent target “is very puzzling.”
Interest rates “should be at least half way down and should be in the four per cent level,” Siegel said.
Federal Reserve chair Jerome (Jay) Powell “is far too cautious and far too deliberate,” Siegel said, adding that the “deliberateness of his thinking is too slow.”
Siegel said short-term interest rates by their nature should be more volatile, but Powell has instead made the long-term interest rates more volatile.
During the sharp equities selloff on Monday, markets were at one point anticipating that the Fed may move to make an emergency rate cut outside of its scheduled meetings. Siegel says there’s no need for that, nor does he expect one.
“Given Jay Powell’s modus operandi, I certainly don’t expect him to do an emergency cut,” he said, adding that Powell and the Fed need to realize they are falling behind their own targets they laid out in June.
Siegel said the Fed has been slow to act which is why a “50-basis-point (cut) should happen definitely and they should message that they now feel comfortable in moving it down as rapidly as they moved up.”
While Siegel said he thinks the time to act is now, market veteran Ed Yardeni called Siegel’s comments “overly alarmist” in a separate interview with BNN Bloomberg on Wednesday.
Yardeni, formerly the chief investment strategist with Deutsche Bank and current head of Yardeni Research Inc., said he expects the Fed will indeed cut rates soon, but potentially only once this year.
He said he expects the central bank to also push back on the notion that some sort of emergency cut is warranted.
Yardeni said upcoming data will show that “the economy is pretty much still on track” and that there is no rush for the Fed to accommodate the demands of Wall Street or economists such as Siegel.
