Top Economist Urges Fed to Make Emergency Rate Cut to Avert Turmoil

WisdomTree Investments’ economist Jeremy Siegel decries the US’s no action as behind the market rout witnessed on Monday. 

Leading economists from the Wharton School of Business are urging the US Federal Reserve (Fed) to consider a rate cut amid the chaos caused by poor economic data and sinking markets. Siegel believes that the central bank should act faster in cutting the rates than the market anticipates. 

The professor emeritus of finance illustrated in a Monday update that the funds rate by the Fed should be within the 3.5% – 4% range. The economist considers such 1.5% below the present 5.25% – 5.5% target range.

Fed Late to Announce Rate Cut

Siegel revealed in the CNBC interview a call for a 75 basis point cut as an urgent intervention on the funds rate. He added that another 75 basis point cut is a desirable minimum at the September meeting.  

The basis point involves a one-hundredth of 1%, implying that Siegel’s call for a 75 basis point cut translates to a 0.75% reduction. 

The suggestion by the economist occurs following disappointing job numbers that fueled fears of a looming US recession. Also, the interest rate hike by the Bank of Japan (BOJ) stirred macroeconomic instability. The interplay of the two factors is behind wreaking havoc across the stocks and crypto markets. Bitcoin took a hit as it plunged below $50,000 since February.

Most observers liken the weekend’s crash to March 2020 during a widespread sell-off as the world battled the coronavirus pandemic. Central banks intervened to guarantee liquidity. The lower rates catalyzed the stocks and crypto rebound to their all-time highs. Siegel, WisdomTree Investments’ senior economist, is optimistic about another cycle of Fed rate cuts. 

Siegel added that the Fed has indicated that the long-run funds rate should be 2.8% at 2% inflation and 4.2% unemployment rate. The economist observes that July’s 4.3% unemployment rate and CPI inflation of 2.97% in June represent 90% progress from the start point. 

Siegel questions why the Fed funds rate is yet to move despite the progress. He considers the inaction as disastrous. 

50 Basis Point Cut Realistic in September

The economist argues that if the Fed acts slowly towards cutting the rate as they did in hiking, it will reignite the worst policy error in the past five decades. Such would illustrate their ill-preparedness and harboring no good for the economy. 

While most economists anticipate the Fed will initiate rate cuts soon, CoinShares’ researcher James Butterfill considers the 1.5% reduction by September an ambitious target. He believes that a 50 basis point cut is likely course in September. 

Butterfill considers the Fed as cautious and ultimately reactive, though one of its implicit mandates is ensuring market stability. Further deterioration in the markets could necessitate an urgent rate cut in August. Nevertheless, Butterfill considers this unlikely. 

According to CME Fedwatch, the market is pricing in 83% odds for the Fed to announce a 50 basis point cut next month. Such aligns with the forecast by CoinShares researchers in the belief that lower interest rates are a bullish development for fixed-supply assets such as Bitcoin. 

Coinshares is among analysts who believe lower interest rates will be bullish for fixed-supply assets like Bitcoin. Although the rate cut will favor stocks, AJ Bell Investment executive Russ Mould considers the signs of looming recession terrible news for the equities. 

The analyst disclosed in a Monday note that frantic rate cuts were witnessed during the 2007-08 financial crisis. The move to counter the bear market effects within the stocks turned futile. The lower interest rate failed to realize its objective since the corporate earnings declined faster than the cost of borrowing.