Jackie: Hello, everyone! Thank you for joining WisdomTree's Office Hours session, FedWatch, where the market's on the naughty or nice list. Today, you will hear from Professor Jeremy Siegel, Senior Economist, Jeremy Schwartz, Global Chief Investment Officer, and Kevin Flanagan, Head of Fixed Income Strategy. And with that, I'll turn it over to Jeremy Schwartz.

Jeremy Schwartz: Well, thank you, Jackie. Thank you, everyone, for dialing in. Professor, naughty or nice was… we'll see what you have to say from Powell. Was he making up for being on Trump's naughty list, being too slow? We'll see what you say. Today was a big day for both the Fed, but also we're going to be live responding to Oracle, part of the key story of AI. Those were the two big narratives of the Fed and AI, so we'll see how the markets respond to that. But Professor, was he naughty or nice from what you…

Jeremy Siegel: I think he was nice. Of course, Trump came in and said he should have done twice as much, of course, echoing what Steve Mirren dissented to, which we knew. There were two dissents on the no change. Goolsby, one of them, not that surprising, joining Schmidt also. But, let me put it this way: I said it was gonna be a hawkish cut. It was a dovish type of hawkish cut. He was not as much saying, “Hey, you know, this is it, you know, of this cycle, and the bar is very high for a January cut,” or whatever. He really said, you know, we're gonna look at the data, and we're, you know, gonna see what it is. There's gonna be an awful lot of data, as we know, that is coming in between now and the January 28th meeting. Finally, we're going to get a lot of data, and that's gonna be the judgment about where things are actually going to go.

If you took a look at the dot plot, there were six members that felt there should have been no changes. It seemed to be, in the press, some confusion. They thought that these were quiet dissents, that they voted one way. No, those were non-voting members that dissented. All 19 are part of a dot plot, although only 12 are the voting, so there were four — I mean, two voting members that said no change, and then four non-voting members that gave you six that actually thought so. There was a lot of discussion, you know, both ways.

A couple things, a number of things that made me happy about this, and feeling that it was a positive equity story. I mean, right off the bat, at the 2PM announcement, the fact that they're buying Treasuries, specifically Treasury bills, much earlier than expected. In fact, starting, I think, in two days, and it's actually going to be 40 billion dollars a month. This was not expected. They call it “reserve adjustment,” but honest… I mean, it's not a part of a new QE, but don't forget, we've been in QT mode for well over a year, so this ends QT in a mild QE, more of a reserve adjustment he talks about. He says that we may taper it in April, but maybe yes, maybe no. Anyways, the market liked that.

But more importantly than the balance sheet issue was just the tone. First of all, the tone that… something that we've been saying all along: that tariffs, for good or bad, are a one-time increase in the prices. And I've never heard Chairman Powell say that so explicitly as he did several times at the news conference. He also, I think, intimated less-than-expected type of increases, saying we've worked through most of it, maybe ending what kind of a one-time in the first quarter.

Remember, I said I thought this was a critical quarter to get through, or getting through this quarter is important. He did extend it out a little bit, but said that that effect is over. We're seeing the inflation in the goods that are tariffed. We're not seeing it in services. I mean, this is something that, if you've been listening to our podcast, we've been saying for six months or longer. So it's great that the Fed is acknowledging what is really happening to the inflation rate.

So, he was much more benign, you know, talked about housing. He, by the way, also talked about how he looks at the break-even — that's the difference between TIPS and the standard bonds. He said, “I don't see any inflation.” It was sort of, instead of, “You know, it's higher than expected, this is going up, all this,” it was, “Oh, you know, I'm looking ahead, and I don't see that much.” So the tone was very different, I thought. Again, he's not guaranteeing a January rate cut. No one knows, because we, you know, the data — you know, we've been sort of flying blind.

And, by the way, here's another surprise. He actually said that he thought that their estimate — and, you know, I may have missed some publication or statement that a Fed official made — but he thought that the current payroll numbers over the last several, six months were about 60,000 a month too high. This has to do with what's called the birth-and-death model, about how many firms are actually being born versus dying. It has to be estimated every year, which, he then explicitly said, makes the 45,000 payroll increase average over the last three months negative! And of course, that corresponds with what we saw in the ADP report.

These are sort of saying we really have had negative payrolls over the last three months, and that's a situation we have to watch clearly. Now, of course, supply's been weighed down, you know, with immigration and other factors, but he's definitely pointed to that. By the way, he also pointed positive on AI, actually spoke to that a little bit as one of the things. I mean, there was nothing scary at all about the report that, “Oh, there's…” there was nothing that I thought, “Oh, the Fed really doesn't get it.”

Now, you know, I still think the rate should be brought down into the lower threes. I've said for a long time that the spread between the 10-year and the Fed funds rate should be 100 basis points. Well, what is the 10-year now? It's exactly 4.14. That makes it 3.14 for the Fed funds. That's, you know, so we've got another 50 basis points to go. How it's gonna be spread out, we'll see. We'll see a lot more about what happens to the economy with the data that is coming in. But it was clearly, despite six people saying, “Oh, I see a strong economy, no change,” in many ways it was a more dovish Powell reading than the November meeting and, or October meeting.

Now again, you know, by the next meeting, Trump may announce a new Fed chair, which might take some of the steam out of what, you know, his opinions are. But he himself — his opinions, his fear of inflation — seemed to be much less in this conference than I have seen at any time over the last year.

Kevin Flanagan: Professor, I wanted to ask you, I mean, we're coming up on, obviously, 2026 in a couple of weeks, and we'll be flipping over some of the regional bank presidents to be voting members. Do you have any sense of who's going and who's coming?

Jeremy Siegel: Yeah, I… I haven't looked at the list, so that… We know there are four non-voting that didn't want a cut. And, you know, the rotation — you know, there'll be seven board members and five voting members, so those five will change. So, you know, out of the 12 districts, you're gonna get two or three. So you're probably, you know, two people that would have dissented, maybe even three people that had dissented at that meeting.

But the truth is, Kevin, and for everybody, I don't put much weight on what they think it should be — cut or not — because so much data is going to be coming out between now and the end of January. One of the things, by the way, I should say that totally surprises me: I looked at their GDP estimate for 1.7 for 2025. Now, we haven't gotten the exact third quarter yet, but both the St. Louis Fed and Goldman Sachs and others think that the third quarter was 3.5%. So, the first quarter was -0.6, second was 3.8, the third is 3.5.

To have 1.7 basically is a zero for the fourth quarter. Now, I know the closing of the government maybe lopped one, and I think actually Powell did mention that he thought it lopped one percentage point off of the fourth quarter. But I don't know where that… I mean, zero in the fourth quarter? GDP growth? I mean, no one… See, I guess I'm the only geek that, if I were sitting there, I would say, “By the way, I'm looking at this forecast. You're forecasting zero GDP growth for the fourth quarter?”

Well, you know, maybe… He actually said, you know, that he said that two-tenths of the GDP growth — that he thought that, really, year-over-year, it should be 1.9 if there wasn't a government shutdown, and it should be 2.1 next year. It's 1.7 and 2.3 because two-tenths is being transferred as a result of the government. Now, I have to remind people that there's another vote that has to be taken at the end of January, whether there might be another shutdown. I don't know. But, I mean, I'm just saying that he actually made that.

But some of these numbers actually don't make sense. Another thing I thought was positive: he actually talked about AI in a positive tone as accelerating growth, but then again, you also have the longer run, 1.8. It's always 1.8. I mean, like AI makes no difference. And for 2028, it's 1.9, and 2027, it's 2.0. And then Jay Powell stands up there and made a statement, “Yeah, you know, it's been the best productivity growth I've seen over the last 4, 5, 6 years, and there's AI coming up.”

And then no one points out, “Then why are your long-term growth numbers so bad? Do you not… I mean, where's that going?” I thought that was also an interesting situation there. But of course, I'm not sitting there asking those questions.

Jeremy Schwartz: Well, Professor, we'll give you the instant market reaction. Like, you get the Fed news, and then you get the press conference. We were going to be waiting for the conference call on Oracle, but the first response was ticking down, revenues light. Earnings looked good, but revenues light, so it was trading down 5–7% on the first set of questions.

Jeremy Siegel: 5–7%?

Jeremy Schwartz: Yeah, so they…

Jeremy Siegel: You know, all those MAG7 and related, you've got to beat to stay even. And, you know, there is a shift in narrative — not a huge shift. AI is important, it's still very important, but the shift in narrative of, you know, are we overbuilding? Could there be a potential breakthrough that reduces the demand for the chips, and all the power that goes in, and all the, you know, power centers and chip centers? You know, what is going on? And the adoption of AI: why has it slowed down?

Are firms just doing so well that they just don't need to implement it? I mean, I… you know, I was always the one that said they were going to offset their tariff costs, but since tariffs have not become a big thing — in fact, I think that they just announced that the Swiss tariffs were down from 29% to 15% on a new deal — so tariffs are not that big a thing, so maybe they're not pressured as much to really implement AI, to use it. But of course, competitive pressure's gonna be… someone's gonna do it and undercut them.

And then, if you don't do it, you will be put out of business, and, you know, that's a longer-term competitive situation, obviously, that people would have to look at. So, is it still down 5% or 7%?

Jeremy Schwartz: Early reads are down around 5 right now, but they haven't had the conference call, so we'll see how the outlook is.

Jeremy Siegel: Yeah, conference calls can change things. What did it do during the day? I didn't follow it. Was it up during the day?

Jeremy Schwartz: It was flat and down a little bit. It wasn't moving a lot. You know, I think you talked about how the users of AI might ultimately get some of these benefits, and I was at an interesting dinner last night where the CEO of Bank of New York, BNY — you know, BNY, we use BNY as our custodian, the sub-advisor in a lot of our funds — so, CEO's speaking about how they've been embracing AI throughout their organization.

He's been doing it for three years, and he made that exact comment that he feels like the beneficiaries and the users of AI haven't really seen it; they haven't, you know, they haven't been rewarded, and that over time there'll be more. But he calls it, like you just said, an “existential risk,” that they feel like they're getting it roughly right, but that if you don't, it could be an existential risk. And over time, we expect that broadening of the participation, that more people will benefit from it, earnings will do better, but you haven't seen that in the performance. It's all been large caps — no small caps, no value stocks.

Jeremy Siegel: Yeah. Well, I mean, you're… I mean, obviously, you have to curate everything AI says, but it gives you ideas, and it gives you information and puts it together in a way that would take you several hours to get to that point. You gotta check it out if it gives you something surprising, and you gotta check out, you know, all that, but it's certainly a time saver for a lot of functions. And I still think it could be a huge productivity boost, but we also know from studies that economists have done — some were actually reported in The Economist magazine a few months ago — why? Idiot. The culture of firms is not to make radical changes unless forced to.

COVID forced a lot of radical changes, including Zoom, as we're doing now, and others. I thought tariffs could have been such a thing, and I mentioned that, but not at this point. Not so much. It will always filter in, but to accelerate a filtering in, you need someone saying, “Alright, I'm faced with this. Now I've got to do it. And I'm sorry, guys, you've been working for me for five years, but I've got to reduce my workforce by 30% to meet the costs of my competitors, who just lowered the price of their goods by 10. And that's the only way I can survive.”

I mean, you know, otherwise that sort of productivity gain goes much slower than it would otherwise, without that sort of a push.

Kevin Flanagan: You know, Professor, I just wanted to follow up. You know, you mentioned on the tariffs, and I think I saw a question come through. We still have that Supreme Court case to be decided. What are your thoughts here? Do you think it's a, what, a ham on rye, or do you think it's actually going to be something meaningful?

Jeremy Siegel: Okay, so… And by the way, there was an implication that it was going to be at the end of December, so it's close. But I'm not sure of that — that they weren't gonna wait to the end of, you know, May, where they normally announce all their decisions. I'm gonna repeat what my prediction is, but do I have, like, the world of confidence in the prediction? No. I don't have any.

My prediction is that they're going to say that most of these tariffs are — I'm not gonna use the word “illegal” — but do not fall under the statutes and laws that Trump used to implement them. But it's very possible that they could give Trump six months to work it out with Congress, say, you know, the belief is that it would be extremely disruptive to stop all of them right away. And so it would be a six-month period, and you work out which you want Congress to do and not.

Since the whole effect is less scary than everyone thought it was gonna be, because it's much lower than what it was going to be, he would get support — not on every one, but on many of them. He also may try to use other statutes; in fact, he's already said he's gonna use other statutes that are much more restrictive, but could keep those tariffs on a number of those goods. So the idea that, you know, all of a sudden the revenue's gonna stop, and refund checks and all that, I tend to doubt that.

Jeremy Schwartz: Normally there's, you know, there's an implementation period.

Jeremy Siegel: Do you work with Congress to get some of them, and then he'd have to work with the Republican Congress. That's not gonna be huge, because there are Republicans that are against a number of those. I think that would revise a lot of them, specifically, if they were targeted on them. It would lead to further reductions, but I think most of the tariff-type process would still probably be in place. I mean, let's face it, I mean, Biden kept most of Trump 1.0 tariffs, even though the Democrats raised a huge stink when he implemented them.

So, that's my feeling. I mean, I could be wrong in the case if they say, “No, and you've got to refund it and stop there.” That would be pretty chaotic and would cause… Wow, I don't know what it would cause. That would be very disruptive, because now you've moved suppliers, you've moved this. What other things? Could you use embargoes? Could you use this? How would Trump react? My feeling is that the Supreme Court does not want a chaotic situation, which would result from a sudden illegality of the tariffs.

Jeremy Schwartz: So, Professor, as you think about this year wrapping up and looking to next year, how are you sizing up, sort of, your year-ahead outlooks here as we start to close the year?

Jeremy Siegel: I think it's good. I mean, first of all, we've got a number of things. Now, this is assuming that we're not gonna have another government shutdown — you know, they're gonna come to some deal. We've got the… we've got, you know, a lot of the corporate tax cuts are coming into effect. The lower individual cuts are coming into effect. Bigger types of deductions for savings and everything else is coming into effect.

There's tailwinds — just as Powell mentioned, you know, probably eight-tenths or one percentage point just from rebound of the government shutdown. There are definitely tailwinds moving in there, and there's no… I mean, obviously we have midterm elections in November, but that's for Congress in 2027, and very honestly, you know, I've thought a lot about it. Yes, people think the Dems are gonna take over the House, but does it matter? What will change? Nothing. I mean, very little.

I mean, it would really change if the Senate changed, and that's considered very unlikely. So, and even then, there's a question of what would change, even if the Senate changed. So, I don't see any legislative problems coming up. I mean, always unexpected geopolitical issues could happen. And I always say we must be on alert for any security threats on our Internet and our web and our whole financial structure.

Kevin Flanagan: Professor, what would you say to somebody if they asked you the question, “So, okay, there could be some fiscal tailwinds. The Fed has increased their median estimate for GDP next year. How does that fly with potential rate cuts? Wouldn't that work against potential rate cuts for next year?”

Jeremy Siegel: Well, okay, first of all, let's talk a little bit about, you know… suppose, I mean, you know, Mirren has said we wanted — listen, I think Mirren and Trump want the Fed funds to be in the low threes, and I think that's appropriate. And that's only now another, what, 50 basis points. So this idea that, “Oh, he's just gonna get, you know, what he wants,” I mean, I don't think much more.

If you take a look at Mirren — I mean, actually, you know, what was his… I'm gonna be looking, because I do have his dot quad. Yeah. So, he really thinks at the end of 2026… now, he thinks that there's going to be disinflation, Mirren, so he put 2 to 2.25. I mean, you know his dot. The next lowest dot is 2.5 to 2.75. As far as that's concerned, and there's only four dots under three. Maybe those people think there's gonna be a recession, as far as that's concerned.

But then Mirren moves it up to 2.25 to 2.5 by 2027, and then to 2.5 to 2.75 by 2028, and then probably keeps it at that level, which is, you know, not that much off consensus of 3. Right? So, yeah, I mean, and he's an extreme example of someone, you know, who is supportive of Trump's position, and even that is not something that I think is going to cause a lot of inflation.

And if the economy is a lot stronger — now, don't forget, 2.3… don't forget, the 2.3%. Remember, Powell himself announced that it was going to be 2.1 if it weren't for the government shutdown. And then it's 2.0 in 2027, and then 1.9 and 1.8, and that's what the whole thing is about: the idea that there's really nothing gonna be from AI. That's not exactly true, because if we're gonna have a slowdown in immigration that's gonna be sharp, then to get the same GDP growth of 1.8%, you do need some speed-up of per capita GDP growth, which is AI.

I'm doing this in my head. So if you keep 1.8 with a much lower growth of the labor force and immigration, that does imply some speed-up in AI to get that GDP. But how much, I'm… You know, is that as much as there potentially could be? Some people think three-quarters of a percent is a potential speed-up of the GDP going forward, long-term, from AI implementation.

Jeremy Schwartz: Maybe I can turn the questions to Kevin. Kevin, as you think about fixed income outlook for next year, with all that the professor said, how are you thinking about where to position within fixed income portfolios?

Kevin Flanagan: You know, I mean, we continue to emphasize the active–passive barbell. I think active fixed income is going to be an area investors should be exploring, because there is uncertainty, to the professor's point, on the data front. Some of this data, we just don't know. And I think an active solution on that front makes a lot of sense. And the one other thing that I would say is I would not be a chaser of duration. If you don't think — like we don't — that a recession is your base case, then you gotta think the 10-year's gonna continue to navigate 4–4.25, maybe 4–4.5, somewhere in there.

So when we dip below that 4% threshold, when you see 3.95, every time over the last two years it's been a fleeting strategy, chasing duration. So I think an active manager, like, you know, one of our funds, like WTBN, I think makes a lot of sense in that environment.

Jeremy Schwartz: A lot of people say, “Hey, the Fed's cutting, we've gotta lock in rates,” and you hear that narrative a lot. I heard that on a conference call yesterday — that we gotta lock in rates because the Fed's cutting — but the professor has talked about a steeper yield curve. Professor, what do you think is the appropriate yield curve today?

Jeremy Siegel: Well, it's gonna be steeper, but it's because the short rate's going down. It doesn't mean the long rate's going down. Long rate right now is 4.15. Before Powell talked, it was 4.16. I mean, it's on one basis point, pretty dovish type of conference. Listen, if the economy picks up, you're not gonna get below 4% in 10 years, certainly not for long. I mean, inflation could do a lot better, and that would be a positive, certainly for the long bond, but if inflation does better, real growth will do better, and that's an offset there.

You know, I've been saying 4 to 4.5%. I mean, 4.5 is, you know, a range that I'm very comfortable in, and, you know, the Fed funds at 3 to 3.5, and the long bond at 4 to 4.5 is exactly 100 basis points, the average spread between 10-year and Fed funds.

Kevin Flanagan: I think what the professor said, just really, maybe to put a bow on it — no pun intended for this time of year — but, you know, not all rates respond the same. And everyone thinks, “Oh, the Fed's gonna cut rates, the 10-year rate has to come down,” and that is not the case.

Jeremy Siegel: Well, don't forget, what was the 10-year, you know, I mean, you know, we called it when the cutting started a year ago, and I said the long rate is gonna go up because the recession fears are down, and that's what happened. Now, by the way, excuse me, I think it's very important: it doesn't mean, because the 10-year is not going down, that rate cuts don't help the economy. Please — $15 trillion of short-term credit tied to this Fed funds rate.

So, that's going down, and everyone borrowing short-term is gonna get a break.

Jeremy Schwartz: Well, on that very positive note, we'll always thank Professor for giving us this post-Fed reaction. Kevin, always great to be with you. Everybody, sounds like we've got a very nice Powell heading into the holidays. You can get those stockings filled, Kevin, with even more goodies for the new year.

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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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