Webinar Replay

Fed Watch: Over and Out

December 13, 2023

During this Office Hours replay, Professor Jeremy Siegel, WisdomTree Senior Economist, Jeremy Schwartz, Global Chief Investment Officer and Kevin Flanagan, Head of Fixed Income Strategy discuss the results of the December FOMC meeting. With rate hikes seemingly over, we now shift the discussion to rate cuts and what's to come as a result of that, in 2024. 

This event was simulcast on Zoom.


Hi, everyone. Thank you for joining WisdomTree's Office Hours on Fed Watch: Over and Out where you will hear from Professor Jeremy Siegel, WisdomTree's Senior Economist, Jeremy Schwartz, Global Chief Investment Officer, and Kevin Flanagan, Head of Fixed Income Strategy.


Jeremy Schwartz:

Well, we often get some fireworks from the Fed and then the professor critiquing the Fed and say, "You should be doing that." We're very different. I'm not sure the professor's going to have that kind of comment today, but it's always great to get his reaction. We've got a bunch of questions coming in. We'll take your live questions. Anything that you hear from the Fed and from the professor, we'd love to engage on that. But Professor, they're coming your way. Powell has been listening.


Jeremy Siegel:

Yeah, let me say, it kind of blew me away. This is what I've been advocating. I didn't expect the flexibility when the headline came up, that three to four rate cuts, I said, "Whoa." I think the voices are being heard that the inflation is basically over. Yes, there's stubborn core [CPI], there's the insurance, there's the medical stuff that takes years to go through, but basically it's over. Commodity prices are sinking, oil prices are sinking. The money supply is sinking, which of course, concerns me going on. There's just nothing inflationary that is going on. Even the wage increases of 4%, I mean, that's not inflationary when productivity is rising at 2, 3, 4%.

Basically, he said the rate hikes are over. Of course, if something terrible happened, something could bring it there. I think the question is when. I think it's going to be sooner rather than later. I don't think it's going to be January. We only have one more labor market report and one more inflation report. January 31st, the next meeting. But I think by March we could definitely start. And I think we should.

Of course, it depends on the evolution of the data. I mean, we have to remember, and I pointed this out, less than three months ago, a majority of FOMC members thought we were going to raise rates in December. A majority. This was less than three months ago. So here we are and we're talking about what they think is going to happen 12 months from now at the end of 2024. Well, if they don't know what's going to happen three months from now, how in the heck are they going to know what's going to happen 12 months from now?

The truth is that they, like we all do, have to read the data as it comes through. But what I'd liked about today is the flexibility... I mean, he absolutely said, "We started talking about dropping rates." So there's two-sided flexibility, and the question is is how fast are they going to drop rates? And it depends on, of course, how fast the decade. I'm going to tell you if we get some weak economic data in January. If December Christmas doesn't... This Christmas season doesn't pan out, we could get a quarter point or so in January that I don't see, but I'm saying it's not impossible. Get retail sales. Of course tomorrow, that's November. We have to wait all the way to January to find out Christmas. But I think it's great news. As soon as that came across, I said, bye bye bye. I mean immediately the Dow was up 200, closed up what? 512 points. It's still a buy. We're going to all-time highs, no question. Certainly in the S&P and the Dow Jones, we're going to all-time highs. NASDAQ will take a little more work.

I don't know when and if, I mean because what you see here... Why did the Russell 2000 increased by, what is it, 3.47%? Now we've had a couple other big moves on that, but usually it backtracked again, it's because with this flexibility, the probability of recession has gone down and that's what been depressing the small and mid-cap stocks, and it's a simple story. It's nothing more complicated than that. The biggest threat was he was going to be stubborn on the downside and he still might be too. It's not completely erased, but that was the fear. Now that he shows more flexibility, that probability has gone down less probability of a recession. So all those small mid-caps that are basically recession priced are jumping. If he continues to show this flexibility, they should have a good 2024.


Jeremy Schwartz:

Professor, one of the things that gave us and you a early read, we've been doing this alternative inflation, and I didn't actually hear a lot of shelter discussion today. Shelter was a big part of Core CPI, you have this alternative way of looking at it using some of the Case Shiller data and the Zillow data for the official numbers. And it shows much cooler numbers. We're talking like 2.2 and 2.8 instead of the 3.1 and 4.0 for core and headline. But our shelter number has been ticking higher. Any incentives? We are like five to 6% different means-


Jeremy Siegel:

There has, and the question is we use a mix of Case Shiller and the rental, the Case Shiller may be distorted on the upside because of the type of transactions that are taking place in the housing market. They're at the high end, they're all cash and they're still moving up and then they apply that to a broader group of housing. There's a case to be made to put greater emphasis on the rental than on the homeownership. Even though two-thirds are homeowner, there's more of a case because you can actually think of the fact that really owner-occupied costs are the cost of the home times what the real rate is on the home. That's really the housing service costs that's provided real rates today. Wow. I mean we got that... The 10-year TIPS, 183, Jeremy, remember that was 250.

So you're getting an alternative measure, which we could think about is using a real rate on a home price. That's an alternative way of looking at it and that's going down rather than up. But yeah, I heard today, and I didn't actually check on the Zillow, but it was said that we had the biggest drop in three years in the Zillow index. I don't know if you caught that or not, but the rental part of it and the imputed rental part is going down. So we used a quick measure of a Case Shiller and a rental. There's a case to be used maybe to overemphasize rentals now and to apply some sort of real rate on Case Shiller and that would show a continued drop in the shelter prices over the last eight weeks.

So yeah, home prices have remained remarkably firm and it has to do basically with the fact that there isn't been supply, and I mean home building and housing starts are very low and people are demanding higher homes, larger homes and bigger homes because of the work from home. I mean, some people going back to work, but other people are adding offices to their homes and they want another home and they want a bigger home. So that's keeping, I think that housing price segment high, but you could argue that the cost on that segment might not be as high as the outright case show or numbers.


Kevin Flanagan:

Professor, I wanted to ask you that at the November meeting, the Fed inserted it had had tighter credit conditions, then they put in financial conditions and they're still there. And there've been a couple of questions kind of around that that we've had coming in. So now you have a 10-year treasury that's dropped a hundred basis points since prior to the November Fed meeting, you have a two-year note now a hundred basis points lower than the top end of the current Fed funds target and corporate bond spreads here in the U.S. investment grade, high yield have narrowed as well. I remember seeing some of the comments from Fed officials, not necessarily PAL saying when it was the reverse, the tighter conditions, it was like, well, the market's kind of doing our work for us. Do you think it works the other way around in Fed thinking?


Jeremy Siegel:

Slightly, I mean more than the Fed, private economists use the interest rate as really number one, but then they use stock market, the dollar spreads and all the rest as a far away number 2, 3, 4, 5. How do you want to weight that? I think some people weight everything outside interest rates as maybe 30% and the interest rate part is 70. I think for the Fed, it's the interest rate is really a bigger part of it. And although they look at everything, but what happens is they see a slowdown. I mean when oil and commodities and copper, I mean when commodities start falling and oil starts falling, it's not just the fact we've had bigger supply. It's a projection of demand. And yes, we had a good employment report for the month of November, but one, it was very narrow. There was just about two or three categories at which it was actually stronger.

And I'm not saying we're going to recession or anything like that. I'm just saying that around the world growth is really slowing and that's why you're seeing this drop in the longer term rates and the two-year rate and the 30-year rate. Now you're dropping the spreads because of Powell's going to lower rates. That does reduce the chance of bankruptcy and the chance of that recession. So I would say that it all fits together and the stock market loves lower rates because that capitalizes earnings going forward. But I don't think the fact that we saw a billion capital markets today is really going to cause the Fed to change course. They're just going to look at what the real economic indicators are on January 31st to make their decision.

One thing I did surprise that he did say today, he did say that they have an opportunity to change their forecast. I always thought they had to get their forecast in by a week to 10 days before the meeting, but he said they give him a chance to actually revise their forecast up until this morning. And he actually opined that some of the governors did so probably as a result of the very good news on the PPI, I mean it was much better news on the PPI than the slightly higher than expected news on the CPI that we got yesterday. So some of them might've actually lowered their rates even more. But yeah, I mean yeah, financial conditions are part of it, but interest rates are most of it.


Kevin Flanagan:

So, Jeremy, just to follow up on that, that's a great point. So I know you've talked about it, we've written about it, watching jobless claims, say jobless claims kind of stay where they are and three-month moving average for payroll stays in that 150 to 200 range, but you continue to see progress on the inflation front. Do you think Powell & Company would be proactive and cut rates before it showed up, say in the jobs or the labor market data, if it was just a function of inflation moving more towards their 2% threshold? Does it have to be both parts of the mandate for the Fed to go?


Jeremy Siegel:

As one of the, in fact, I don't know if it was Glauber from the AP asked, or one of the other, if you think of inflation falling and you keep the rate the same, you're really tightening it and in fact one person pointed out you think, you say you're tight now you're just going to drop the rate by the same as the number of basis points you think inflation is going to go down, then you maintain the real rate at the same level and you're not loosening, right? So there's a question if you really want to start loosening, you've got to move the rate down more than inflation is going down.

That's why I think there could be, well more than 60, 70 basis points worth of cuts that actually come in because if they really see inflation under control, then they got them lower to their neutral rate. Now I think they have the neutral rate of two and a half on Fed funds. I think it's higher, but it could be three and a half and that's a 180 basis points under where it is today. I think really probably neutral Fed funds is three to three and a half right now. Although they have it penciled in at two and a half when you take a look at their long-term projections.

Again, they're pleased with how things have turned out that everyone is, no one forecasts it including the Fed. I mean I was very worried last year and early this year then they stopped money supply started increasing now started decreasing again. Getting concerned, now I see if they're going to lower rates, we can get loan demand up and we can get that money supply growing again, which I think will bring about good growth. I think that the basics for productivity growth rebound are still in place for 2024 AI and a rebound from... We still haven't completely rebounded from the terrible performance of productivity at 2022 work at home as people realize with the job market not as tight as it was that they have to produce to keep their job.

And that's a major consideration because if you think you can't be fired, you're not going to work as hard as if you think you can be fired. And I think that slowly it's changed and the word out there, I talk to people, they say, yeah, the labor market is not the way it was, even though job openings are still high, they've come way down and in some key areas in tech and even biotech, it's just not what it was.


Jeremy Schwartz:

Professor, for people who don't follow that neutral rate and your comments closely, I know that when you say that 3.5% is what you think is a neutral rate, that's a big statement for you versus 12 months ago or 18 months ago. And some of that is tied to even a day like today. There's the rising correlation between stocks and bonds and less the hedge asset. But maybe talk through how you've evolved on that neutral rate and then what that means for the tenure. So 350 is neutral, is four where we are in the tenure. Exactly. You've already priced in all the-


Jeremy Siegel:

Yeah, I actually said I thought it would go down to four now it's at four already. So basically as those people followed either our Zooms or our podcasts, I pivoted in July. I looked at the economy really closely. I was seeing a lot more strength than I did. And when I said... I said, wow, the neutral rate has gone up, it's not zero to a half a percent. Neutral rate or neutral real rate, if you want to be more explicit is that rate that would exist when supply and demand are in balance and when inflation is around 2%. So if the real rate is a half a percent, that means 2.5% Fed funds. If you'd look at the long-term that just came out today, you see 2.5%. But I think because bonds and stocks, we've seen them being more correlated in inflationary times.

And even though I expect deflation to rule over the next year or two over the next 10 years, we are more likely to have more inflationary episodes, not as bad as what we had after the pandemic, but inflation is going to be more persistent through many factors. Bonds are not as good a hedge. If they're not as good a hedge, they demand a higher return, a higher real rate and a higher nominal rate. And that's why I've moved up my real rate from zero to a half per percent to about maybe one to one point a half percent. No one knows exactly. I mean Jay Powell said today the big question of what it is, they're keeping it at one half, interestingly enough, and I was always way below them as it was coming down over the last 20 years.

Now I'm hooking up to say I think that real rate is probably closer to one and a half, 2% inflation gives you a three and a half Fed funds, that region, but they have not moved up their real rate right now. And by the way, one factor that moves up real rates is not just the worst correlation between bonds and stocks, but also faster economic growth. And I have voiced the fact that I think that AI could add 50 to 75 basis points to real growth over the next three to five years. Still very uncertain, but faster real growth, productivity boost, et cetera is a factor. Raising real rates and raising neutral rates.


Kevin Flanagan:

Professor, there's always that... I guess I don't know if it's a disconnect sometimes or not, between Wall Street and Main Street. So here we are, the Christmas holiday season and a lot of people getting together and when you talk to people they don't feel... At least this has been my anecdotal type of experience, they don't feel inflation has come down like we've seen in some of the official statistics. Can you kind of comment on that? I mean, what are consumers feeling?


Jeremy Siegel:

Okay, so it's basically the following. First of all, most people don't understand the difference between the price level and it's first derivative, which is inflation and the price level has not come down. In fact, actually Powell kind of talked about that. What people are unhappy about over the last three and four years is the fact that the price level has gone up more than wages over the time. Yes, Biden can say over the last year, wages have gone up more than prices, but not over the last three and a half years, not over the sensitive indices that we have actually calculated that include current housing rather than the real lagged housing that is used by the Bureau Labor Statistics. That's why they're unhappy because for the average American worker, he or she has lost purchasing power. And for the average American worker that doesn't own their home, that loss in purchasing power has been substantial.


Kevin Flanagan:

Jeremy, I think we should have the professor run for president. That's a great answer.


Jeremy Schwartz:

That would be a much better choice, I would say.


Jeremy Siegel:

I mean, yeah, I've done a lot of explaining though. Even my wife said, "Oh, look at the data is good, Jeremy, why are people so unhappy?" And I said, "You've got to look back at a longer perspective here." And when they judge a presidency, they judge the four years, well it's I guess three years. Three plus. I mean they look over the whole... Things have been pretty good over the last year, but things were really not good at all over the first two years and they have not proved enough for the average person and the average person without a home is suffered one of the biggest drops in purchasing power in probably over four decades.


Jeremy Schwartz:

So professor, there's been a lot of questions on the recession. You talked about the flexible mindsets lowering the probability of recession, sort of hitting the soft landing and small caps rallying on that. There's been some questions about value investing. Is that going to be broader participation in 2024 on that same view? But any comments on the probability of that recession and what it means for earnings multiples all that?


Jeremy Siegel:

Well, I mean definitely. I mean even Powell admitted, everybody, every private forecaster, myself and the Fed and everyone predicted a much softer economy. No one predicted 2.5% GDP growth. No one, no one predicted unemployment would be 3.7 at the end of this year. Nobody, no one was with one or two standard deviations of that. I mean, I was one of the very few people that were positive on the stock market in December of 2022, if you remember. Actually, Bloomberg did a study and they said for the first time in 20 years there was more. The actual median stock market forecast of December 22 was negative, but on the real economy, no one expected. Now why do I start it out that way?

The chances of a soft landing have definitely gone up. Are they one? No, of course not. Jeffrey Gundlach, you may have seen him on CNBC. He's now their major commentator after the Fed meetings. He still thinks it's high. I remain very neutral. I was saying fifty-fifty and I was moving towards now only. And now when I see this flexibility, maybe even it's only one-third soft landing, two-thirds, that doesn't mean we might not have a little softness in the first half and GDP grazing zero or a half or one, but then roaring back in the second.

It's very hard to say, but clearly I had written into my presentations over the last month, the biggest risk to stocks was the Fed being inflexible. Well, the Fed being inflexible. Now that probability is not zero, but has gone down dramatically. So right now, that flexibility is going to feed into the market. I mean it's everywhere with the yields down and this flexibility. Now, they may be wrong and things might happen, but at least until more data comes in that is really very negative. All-time highs, S&P, all-time highs, Dow Jones, NASDAQ needs a little more work I guess being further away from the all-time high,


Jeremy Schwartz:

I'm going to do a few rapid-fire questions and help people answer. One Tom wrote in is, the update for Stocks for Logon available. The sixth edition is available signed by Bookshelf behind me. So Tom, you can get the sixth edition. We might have some copies if you reach out to our team. The one question on 60, 40 portfolios. Now, one of the things we do at WisdomTree is we do manage model portfolios if you're an advisor on this call, we have Siegel-oriented model portfolios where we're getting some of these ideas and on his views on how to be positioned across equities and have run some income-oriented mandates on different platforms.

Kevin, any final thoughts from you?


Kevin Flanagan:

No, I just wanted to get the professor's take because it has been asked a few times, and you did talk about a 4% treasury tenure. We're there. We were kind of joking offline. Okay, I'm going short here. So I'm a couple basis points in the money right now. Do you think that the treasury market has already priced in the good news? I mean, and now you would really need to see the economy more shift to a harder landing for treasury yields to fall further from here?


Jeremy Siegel:

I would say with this big drop today, 15 to 20 basis points from the morning. I mean the PPI, may have gave it a few more. The 15 maybe on that, I said four, three and three quarters of four. No one really knows, has a price of everything but a high. I would say in large, probably yes, maybe there's another 25 basis points, but again, maybe the damage and the higher growth has brought up the natural rate not as much as I thought. No one knows exactly where that is. You just look at the market and tell. But your question's a good one, Kevin.

I mean, I was telling, I thought when everything settles down, we're going to be three and a half on the three to three and a half on the Fed funds four and the long, around four and the long we're way away from for the Fed funds. So we're going to have to see how that comes. But there's challenges on the long side. I mean, there's the funding, there's the debt, there's the potential future inflation. The fact that the Fed may really give up well before two, somewhere between two and a half and three more. I mean, there's a lot of things going on.


Kevin Flanagan:

In agreement.


Jeremy Siegel:



Jeremy Schwartz:

Well Professor, we always love getting your thoughts. I'm glad that the Fed saw it your way. They came your way listening. You didn't have to critique them today. You get to celebrate.


Jeremy Siegel:

No, I think it's my most praiseworthy commentary on Powell since the pandemic.


Jeremy Schwartz:

That's great. We're happy that Powell is following your way. And everybody thank you all for joining us.


Jeremy Siegel:

Happy holidays everybody.




10- Year Treasury:  a debt obligation of the U.S. government with an original maturity of ten years.

Basis point 1/100th of 1 percent.

Consumer Price Index (CPI): A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them; the goods are weighted according to their importance. Changes in CPI are used to assess price changes associated with the cost of living.

Core CPI: Long run trend in the price level that excludes items frequently subject to volatile prices, like food and energy. Can also be known as, CPI ex-Food & Energy.

Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq.

Federal Reserve: The Federal Reserve System is the central banking system of the United States.

Fed Funds Rate: The rate that banks that are members of the Federal Reserve system charge on overnight loans to one another. The Federal Open Market Committee sets this rate. Also referred to as the “policy rate” of the U.S. Federal Reserve. 

Federal Open Market Committee (FOMC): The branch of the Federal Reserve Board that determines the direction of monetary policy.

Gross Domestic Product (GDP): The sum total of all goods and services produced across an economy. 

Money Supply (M2): Contains all funds deposited in checking accounts as well as funds deposited in savings accounts and certificates of deposit. There are various ways to measure the money supply of an economy. This one is meant to broadly account for the majority of savings and checking accounts held by individuals and businesses across the economic landscape.

Nasdaq Composite Index: The market capitalization-weighted index of over 2,500 common equities listed on the Nasdaq stock exchange.

Producer Price Index (PPI): weighted index of prices measured at the wholesale, or producer level.

Rate Cut: A decision by a central bank to reduce its main interest rate, usually to influence rates charged by other financial institution.

Rate Hike refers to an increase in the policy rate set by a central bank. In the U.S., this generally refers to the Federal Funds Target Rate.

Recession: two consecutive quarters of negative GDP growth, characterized generally by a slowing economy and higher unemployment.

Russell 2000: Measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.

Shelter: The shelter component of the CPI includes two major items: rent of primary residence and owners' equivalent rent.

S&P 500 Index Market capitalization-weighted benchmark of 500 stocks selected by the Standard and Poor’s Index Committee designed to represent the performance of the leading industries in the United States economy.

Treasury Inflation-Protected Securities (TIPS) Bonds issued by the U.S. government. TIPS provide protection against inflation. The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater.

Treasury yield: The return on investment, expressed as a percentage, on the debt obligations of the U.S. government.



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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.


Jeremy Schwartz and Kevin Flanagan are registered representatives of Foreside Fund Services, LLC.


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