Jeremy Siegel, a finance professor at the University of Pennsylvania’s Wharton School of Business, said he expects the Fed to cut interest rates at its meeting this week, but to do so with a “hawkish” tone.
Appearing as a guest on CNBC’s “Squawk Box,” Siegel made important assessments about the eagerly awaited Fed decision by the markets, the nomination for the next Fed chair, and the future of interest rates.
Siegel said he expects the Fed to cut interest rates by 25 basis points this week, but predicted the decision wouldn’t be unanimous. “I call it a ‘hawkish cut’ because I think there will be objections from both sides,” Siegel said.
The renowned professor noted that Fed Board Member Mester could seek a larger 50 basis point cut, but two or three members could vote to keep interest rates steady. Siegel added, “If that’s the case, this could be the most dissenting opinion in Jerome Powell’s nearly eight-year tenure as chairman.”
Siegel also spoke about the new FED President candidacy, which will be announced by the new US President Donald Trump at the beginning of next year, and noted that the name Kevin Hassett came to the fore.
“The probability that Kevin Hassett will be the next Fed chair is currently around 70 percent,” Siegel said. “Even if his name isn’t officially announced, Hassett’s rhetoric will start to move markets much more than it has in the past.” Siegel also noted that he and Hassett had worked together on John McCain’s campaign in the past, calling him a “fantastic economist.”
Siegel, speaking cautiously about the impact of interest rate cuts on the bond market, said he did not expect long-term interest rates to fall much.
Siegel detailed his analysis with these words: “Looking at the last 75 years, we see that the Fed funds rate has been approximately 100 basis points below the 10-year bond yield. Currently, 10-year yields are at 4.15%, meaning the Fed rate could fall below 3%. However, this may not significantly lower long-term interest rates, and therefore mortgage rates.”
Despite this, Siegel stated that interest rate cuts will contribute to the economy, saying, “Over $15 trillion in loans are directly tied to the Fed funds rate. Short-term borrowings like vehicle loans, inventory financing, and credit card interest will be directly affected. This will definitely stimulate the economy.”
Siegel added that despite concerns about tariffs, the economy is currently holding up well and there has been no significant slowdown in sales.
*This is not investment advice.