Host

Hi, everyone. Thank you for joining WisdomTree’s Office Hours with Professor Siegel on Fed Watch: Are We Nearing the End of This Rate Cut Cycle? You’ll hear from Professor Jeremy Siegel, WisdomTree Senior Economist; Jeremy Schwartz, our Global Chief Investment Officer; and Kevin Flanagan, our Head of Investment and Fixed Income Strategy.

Jeremy Schwartz

Well, Professor, not sure how exciting of a Fed meeting it was, but we’d love to get your take. We saw you on CNBC giving a preview, but we’ll get more in depth on all the things that you're reading and then just the current state of the market.

Professor Siegel

Yeah. John Ford asked me what stood out to me. I said the first thing that stood out to me—I’m paraphrasing—was Powell telling Trump, “You’re not getting rid of me until I’m completely cleared of all charges.”

Now I want to dig into this a little bit because I think the market reacted to that.

Powell has the right to stay on as non-chair for at least another two years. I think it’s at least two years. There is nothing that Trump can do to remove him unless he’s convicted on these charges and then there’s an impeachment and blah, blah, blah. There’s nothing they can do.

So basically, now Tillis says, unless Powell is cleared through these trials, I’m going to hold up Warsh. What Powell is saying is, even if Tillis caves into Trump and says, all right, we’re going to confirm Warsh, I’m staying on—not as chair, but I’m staying on.

And as almost unprecedented as that would be, he has a high-profile position as former chair, and he’ll put his two cents in, to be sure.

What I saw was, after that statement, the long bond went up by 4 basis points, saying, “Oh my God, we may not get those rate cuts when Warsh comes in unless Trump clears him,” because Powell will argue the other way, perhaps. I don’t know. A lot of things affect rates and all the rest. I was trying to look at oil at that particular juncture, and I didn’t see any particular rise. The 10-year has been following oil pretty closely because of the inflationary consequences of that. But I thought that was very interesting.

Also, what Powell says is he has made no decision, if he is cleared or if the case is dropped completely, whether he’s going to stay on or not. I don’t see why he should stay on otherwise. He said, “I have not made that decision, but I’m staying on until I’m cleared.” I thought that was quite interesting.

Perhaps the second most interesting thing is that the Fed raised its longer-term—and this is beyond 2028—real GDP estimate from 1.8 to 2%. That is the biggest increase I have ever seen. I haven’t gone back through all the data. When I was talking to Steve Liesman on CNBC, he had someone look back and it had been 2% and down, but it never had gone up. I think it went down from 1.9 to 1.8. Never have I seen a rise like that. That’s huge.

One has to remember, as I pointed out in my article about AI, if you raise real growth by 50 basis points long term, you solve the long-term U.S. government deficit problem. By moving up from 1.8 to 2, that’s almost half of that increase. Wow.

Now listen, they could be wrong. All sorts of things could happen. I’m just telling you how important that is.

But what also is really interesting is that from December they raised their GDP estimate for this year and next, and they raised their inflation estimate for this year and next, and actually the dot plots are the same or slightly lower than they were in December.

The median was the same at the end of this year, 3.4, one cut. But if you look at it, Mirren has now joined the pack more instead of being an extreme low point. If you take out Steve Mirren’s figure, actually a number of the people went down, which was pretty amazing when you think of GDP going up, inflation going up, and yet I’m lowering my fed funds target. What is that all about?

One of the things it’s all about is that GDP targets are going up because of productivity growth, which might be a calming influence on inflation, although my estimate of inflation is up. Maybe it’s just temporary inflation, so they’re seeing through that and then looking further ahead.

Actually, the long bond rallied at 2:00 when this was released, as a number of people thought the median would show a hawkish tilt, which there was not, in the dot plot. That didn’t last long. As I said, I don’t know if it was the comments from Jay Powell saying he’s staying on or what was going on, but then of course it not only lost it, but the long bond is continuing to rise right now.

Truthfully, what is dictating today is what’s going on in the Middle East. The Israeli strike on Iranian gas and the Iranian response opens U.S. targets to hit oil infrastructure in the Mideast.

Now we don’t know their capability, but we have not stopped the drones and we have not stopped all the missiles. We’ve stopped a number, but not all of them. It opens up a new phase. Oil jumped, and I think this is what is causing it. If you ask why the market is down 768 points, I don’t think it’s the Fed. I think it’s oil and how long it’s going to stay up. I think that is definitely the dominant factor here outside of that.

He said it’s uncertain. He did say something I’ve stressed time and time again, and that is that especially at the March meeting, the earliest that point is for December, so we’re talking about nine months away. They have no idea what’s going to go on. In fact, if you read between the lines, Powell almost said, “Forget about this. We have to put something down. We really don’t know what’s going to happen.”

People follow all this like a hawk—not that they’re hawkish, but they follow it closely. But the truth of the matter is that it becomes more meaningful in the June and September meetings, particularly then when you see a shorter term at the end of the year. But after that, they really don’t have any idea what’s going on.

With the uncertainty about the war and everything else, he even made a comment that if there was a time for us to skip trying to guess what’s going to happen, this would be the time to do that. I’m paraphrasing, but he absolutely did say that.

So the question is, everyone has projections. We all know that the band around these projections has grown dramatically as a result of the war and now as a result of the potential escalation of the war and what off-ramps are basically available.

As I said, on Monday I saw a rally. There was some talk that there might be something coming from Iran to de-escalate, and that is not happening. And now with the Israeli hit, that is definitely not happening. We’ll see what it is, but I think that is basically what the stock market is worried about.

If it continues to be closed, as I said, the correction is likely. That’s nothing terrible—a 10% drop. We’re not there yet, and I’m not predicting it for sure. I’ll tell you one thing: if there’s a ceasefire, or if ships get through for some reason or another, you’ll see a big rally in this market. It’s really trading on what’s going on in oil, and we all know what’s going on in gasoline being up $0.70 a gallon, etcetera—the most visible price of any commodity to consumers. So it’s something that people talk about more than anything else.

So that basically, I think, what is going on with oil and how this is going to turn out is by far the dominant feature.

Also, it’s interesting how much oil is getting through pipelines and alternative ways. My feeling is that if we give it another four or five years, we could probably build a way to completely avoid the Strait of Hormuz, and then Iran would have zero leverage whatsoever. But we’re not there. That’s a matter of time.

We also know, of course, if you can’t put it into the tankers, you cannot run an oil well at 30% of capacity. Once it gets below a certain capacity, you have to shut it down. There are a lot of discrete things that happen when you can’t run at capacity.

And now there’s a danger of how much firepower Iran has left and how much potential they have to damage the energy infrastructure in the Mideast because that damage could obviously last a lot longer than any closing or opening of the Strait of Hormuz.

Jeremy Schwartz

Professor, on the key topic, you’re talking about productivity and longer-run GDP growth estimates. What’s your sense of the longer-run inflation impact? Because everybody’s worried about this oil. Are we high?

There are fears about it being higher and the spillover effects.

But how do you see both the real-time inflation now with some of our rental data and also just the sort of—

Professor Siegel

Yeah, Paul was asked about why the housing data still shows, when all our real data shows almost no increase in housing prices and no increase in rentals. The rental pressure is really off.

Part of the rental pressure, I think, was immigration that was coming into the market. A million people have to find places, and that pushes things up. Now what do we have? Is it three years? Apartment List is showing basically no rent increases. It’s cyclical, goes up in the summer and down in the winter, but net zero over two and a half years. Case-Shiller is between 1 and 2%.

I don’t know what’s going to happen with hotel and travel and all the rest. That’s only 10% of the shelter, “away from home” segment, and that generally has been slightly on an upward trend. But that is the biggest component. It’s 40% of the CPI core, a little less of the PCE deflator. It’s moving downward.

Also, what Powell did mention is that most of the tariff effects are felt. In fact, it could be that tariffs going forward might be even a little less than what they are. As Powell said, we can measure goods inflation. We had goods inflation from the tariff. We can measure that. If that is less or comes off—if Trump decides, “I’m going to stop inflation by temporarily getting rid of the tariffs”—that’s huge also.

By the way, and I mentioned this last week, what do we have for the dollar index? Yep, it crossed 100. DXY crossed 100, 100.12, up 6/10 of a percent today. We’ve had, what, a 6% rise in the dollar? That’s 6% lower import costs for whatever tariff you’re putting on the goods. That’s a big positive.

I’m talking more near term here, Jeremy. AI is definitely a deflationary force because it makes things more efficient to do, lowers the cost of production, and therefore lowers the price. That is long term.

But now, when will we get back to actually 2%? When all this rolls through, as Powell did mention in the Q&A, don’t forget the tariffs came on last summer. So the year-over-year effect starts rolling off in the summer. We are now comparing year over year with pre-tariff versus post-tariff, and that bump will continue until the summer. Then the tariff, even though it’s still on, will not have any more inflationary effect, and that is a downward pressure on the inflation rate going forward.

Kevin Flanagan

Professor, you mentioned Mirren once again dissenting and coming back to reality. It’s only for a quarter point this time.

Professor Siegel

Yeah, I said it. Well, Mirren said in December that he wanted 2% by the end of the year, and now Mirren says 2.25. So he’s moved, and he was way off.

There’s one person who says 2.5, and there are three people who say 2.75. So there are four people saying under 3. In December there were only four people saying under 3. Now there are five people on the committee saying under 3.

Kevin Flanagan

What I wanted to ask is, there was conjecture going in that perhaps Waller and Bowman might dissent as well based upon the February jobs report, and you didn’t get that. Do you read anything into that?

Professor Siegel

Well, I think Powell was asked about it and he said, listen, January surprised on the upside, February on the downside. When you average it, it’s not that bad.

Now people talk about momentum, but I’d rather have it low-high rather than high-low because there’s momentum going one way or the other. And it’s something I mentioned last week. We don’t see weakness in all the other labor indicators. So was that just really partly correcting the excess?

He also mentioned, by the way, we had a strike and we had terrible weather, and then when you average it with an upside surprise in January, it is not a collapsing labor market. So I think that’s the reason why he didn’t have Waller or anyone else coming in to call for a rate cut.

Kevin Flanagan

Another question we got, and I’ve seen this a lot, is that it always tends to allude to the fact that Warsh is going to come in and perhaps be visibly dovish. Do you agree with that?

Professor Siegel

No, I don’t think he’s going to be visibly dovish. We’re going to see. We have three months.

Obviously, my expectation is Trump is going to drop this, he’s going to be confirmed, and it’s my understanding that if he totally drops it and Powell is exonerated, then I think Powell will step off. Then Mirren might be on permanently, might take Powell’s position on that. But let’s go back to Warsh.

I think it is the strategy and the decorum of the chair to gather all other opinions. He has his own opinion, certainly, and during the meeting he might voice it, but he’ll gather all the opinions. He won’t be publicly visible in that way. Then he’ll make his case and see what the committee decides.

Now we don’t know what’s going to happen in June. My goodness, given the war and everything like that. So let me just say, by the way, I think we’re probably going to have no change and we’re not going to have a hike. I think we’re going to have no change into the next meeting. And then June is going to be the real important one—the first meeting of Warsh. That’s the most important meeting of the year, maybe in years. That’s really where we’re going to see what’s going to happen, what the state of the economy is going to be, and how he’s going to run these meetings.

The public statements that Powell makes after each meeting used to be quarterly only at the dot-plot meetings, and Powell made it every meeting. Whether he’ll continue that tradition or not, I don’t know. But the June meeting is a quarterly meeting, so he will be in a statement and Q&A mode, and how he handles that, we’ll get a flavor of it.

For instance, if he doesn’t drop it and let’s say it’s a close case, he would probably state, “Even though it was my preference that we should cut.” There’s nothing that says you can’t say what your preference is. “The rest of the committee did not agree with that assessment.” He might dissent as a signal to Trump that he’s trying to lower rates if it’s close. If it isn’t close, then it’s going to be more interesting because if everyone says he should not lower rates and he does, then it looks like he’s being overly political.

But listen, June is a long way away right now in terms of what the economy could be doing. I could do a lot of scenarios. It’s kind of silly. Let’s just wait until just before that meeting and we’ll know a lot more.

Jeremy Schwartz

Professor, a few questions wrote in. One of them was on this rotation, pre-war even, but over the last 12 months international and emerging markets have been starting to do better than the U.S. Does anything here change any of your view?

Professor Siegel

It’s obviously been hit by the dollar strength. This oil has interrupted that trend clearly. We had great outperformance. Look at Japan, which imports, what, 70% of its oil or something like that. It’s obviously been hit really hard. That was a market that was way up and then got really hit. The dollar is up 5%, and that hits you on your international exposure.

A lot of the trends that were going on could bounce back if there’s some resolution to this Iranian situation, and I would expect that trend to continue. But I can understand the economics about why it’s been interrupted.

Even with the interruption, it isn’t like value has done all that badly. Of course oil is in that group, so that helps the value group. But the shifts that we had been seeing cyclically—obviously higher oil, higher gasoline—basically people are saying that the higher gas prices cancel out the Trump income tax cut. Not the corporate stuff and all that; that’s still positive. But it could hit disposable income by that amount, especially if it goes a little bit into food because of fertilizer and several other factors. So that neutralizes that effect. And that’s a cyclical effect. So cyclically important industries, which are more the value stocks, are going to be hit more in those circumstances. And indeed they are.

Jeremy Schwartz

On the broader case, one of the cycles we’ve been talking about for people thinking about international on a long-term basis, you’re certainly seeing a lot of interest in the defense space because of all this stuff happening. I’ve been talking about it as a defense tech super cycle, that you think about innovation and all the new discoveries we had because of money spent on defense. Europe and Asia are clearly spending a lot more. So if you think the U.S. is the only place for innovation and technology, I think the spending will—

Professor Siegel

Oh yeah, that’s very important. Look, Ukraine knew about it, and I think we all know the importance of drones now. I think there are billions going into drones and countering drones and that sort of defense, instead of just anti-ballistic missiles. That sort of defense is still important, but drone defense is also extremely important, and military spending overall depends on Iran.

It would really be quite something if the best thing happens and there’s a ceasefire, they don’t block Hormuz, and there’s some sort of agreement with the United States, even if the clerical regime stays in power. That would be a big positive for the region.

Now Hezbollah, which Israel defanged last year, has certainly not been what it used to be, but Israel has now had to go back into Lebanon and they have been doing so. But obviously defanging Iran and saying no more of the militias, including the Houthis and Hezbollah, would bring a huge amount of peace to the region. It would make the Mideast probably the safest place in decades. We’re not there yet, of course, but that is a possibility.

Kevin Flanagan

Professor, one of the narratives in the bond market last week was that as the war goes on, we’re spending a lot of money each day and that this could result in the U.S. budget deficit increasing. Can you give some stock into that?

Professor Siegel

I don’t know how much we’re spending. At this particular juncture, I don’t think it’s that much. But yes, I would say you’re right, Kevin. Some of that bond move reflects that.

So we had a rise in the 10-year. What does that reflect? Inflation, okay. You’ve got to think of the Fisher equation—compensation for that inflation, higher deficits. I think that is also a factor that is influencing yields. Higher defense spending could mean higher real growth into the future, offsetting the consumer loss.

We just don’t know how long oil prices are going to stay up. We do know what happened in the Ukrainian situation, but I don’t know what could happen over here. Today is a big uncertainty day because it is a marked escalation and we just don’t know how all the actors are going to respond.

Jeremy Schwartz

Well, here’s to hoping that we get a good resolution in a relatively quick time.

I think our team does think the energy pop is a bit temporary. We do think it’s going to head back down, and I think we’re positioning for reducing some exposure in energy.

Some of these tech stocks, things like NVIDIA—on our podcast last week I went out and called NVIDIA a value stock. I don’t know if I want to echo it, but Jim Cramer, I saw today, called NVIDIA a value stock. We’re starting to see real sell-offs in some of these big technology names, making them more reasonably priced. I think NVIDIA is actually a very interesting one that we are adding some exposure to in value strategy. So it’s very interesting.

Professor, always great to get your talk post-Fed meeting. Kevin, any closing words?

Kevin Flanagan

Just real quickly, obviously we’re going to be following during the war and hopefully afterwards in the not-too-distant future. Just on the private credit front, we’ll be putting out some things. We’ll be having some Office Hours on that as well.

Bottom line, we don’t think it’s a systemic situation at this stage, but stay tuned. It’s going to be something that will certainly continue to make headlines in the bond market.

Jeremy Schwartz

All right, Professor, Kevin, always great being on with you.

Professor Siegel

Okay, have a good weekend.

Kevin Flanagan

Thanks, guys.

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Professor Jeremy Siegel is Senior Economist to WisdomTree, Inc. and WisdomTree Asset Management, Inc. This material contains the current research and opinions of Professor Siegel, which are subject to change, and should not be consid­ered or interpreted as a recommendation to participate in any particular trading strategy, or deemed to be an offer or sale of any investment product and it should not be relied on as such. The user of this information assumes the entire risk of any use made of the information provided herein. Unless expressly stated otherwise the opinions, interpreta­tions or findings expressed herein do not necessarily represent the views of WisdomTree or any of its affiliates.

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