Webinar Replay

Will the Fed be Able to “Shake It Off” and Cut Rates Later This Year?

June 12, 2024

During this Office Hours replay, you will hear from Professor Jeremy Siegel, Jeremy Schwartz and Kevin Flanagan who discuss the results of the June FOMC meeting. Within this discussion, they focus on where the expected direction of monetary policy here in the US is headed.


Hi, everyone. Thank you for joining with WisdomTree's Office Hours on Will the Fed be Able to "Shake it Off" and Cut Rates Later This Year?, where you'll hear from Professor Jeremy Siegel, WisdomTree senior economist; Jeremy Schwartz, our global chief investment officer; and Kevin Flanagan, our head of fixed income strategy.

Jeremy Schwartz:

Well, the markets certainly liked today's data, we'll get the professor's take. We'll see if the marks are shaking off some of what Powell said and what the professor, his view on it. Kevin, it's always great to be on with you on these post-Fed, post-inflation days.

Professor, I know we've got our own numbers on inflation. You've got some interesting takes on all this happening, so get right to it. Give our listeners some of your view of what's happening, what Powell said.

Jeremy Siegel:

Yeah, well, first of all, I thought it was a really good report. I thought it was a better report than the details, and one of the major reasons is that we got below expectations despite the fact that the distorted rental component stayed at 0.4% as it has for I think about four consecutive months.

Powell made reference to it a lot. I mean, it took him three years to get it. If you've been listening to us, we got it right away, but the Fed didn't, but he does now. He realized how lag that actually is, and in fact, Gundlach, who was on CNBC right after commenting, he's been talking about it too. In fact, he pointed out basically if you use real shelter data like apartment list, basically, you're well below two on a year-over-year inflation number over here.

As Powell said, you're going to get that filter in. We just don't know when. We all thought it was going to filter in much earlier, but the way it's constructed, it's filtering in low. All right, so nonetheless, I thought it was pretty, maybe

A little bit of an overreaction when the tenure went from 442 down to 426 and then it kept on going down until two o'clock. Now, let's talk about the number of cuts. The Fed has absolutely zero idea how many cuts they're going to make. It's almost like how many of these members think it's going to snow on December 31st and sometimes it's 13 or 14 and sometimes 11 or 12. They don't know. They absolutely don't.

In fact, if you listen closely to Powell, he used the word data dependent more often than any other thing, "It just depends on the data. It just depends on the data and it does just depend on the..." I mean, look at how things have changed.

Now, let me say something else, which I think is a little misunderstanding. Everyone had to put their projections of how many cuts they thought was going to make before the meeting, about three or four days. He gave everybody the opportunity to change their meeting as a result of this morning's data. Now, his comment was a few did, most did not.

Now, you got to be careful. Did most did not because they didn't think that the data changed their forecast? No, not really. If you understand how people work, people say, "Yeah, I might've changed it. I'm not changing it, going through that, all that process, etc., and so on." And in fact, he made a comment.

He said it was really close in the discussion. A lot of people put one or two. Said, "I'm right in between," and you got to pick one. All right, so shoot a dart and pick one. I bet if you actually took a poll right now, you would have more in the two cuts than you would in the one cut. But again, does that make any difference? No, because it all really depends on the data. Now what we're saying is we think the data is going to be coming in good on the inflation front.

Now, it is true that long bond has given up almost half of that pretty mammoth gain that it made before. On the stock side, we go back to the theme that, well, I mean, it's a mix theme. I've been saying there's nothing that I see yet break the momentum of growth over value, and to...you take a look today and you take a look at Nvidia and you take a look at Apple.

Boy, that's a little bit puzzling given Cook really didn't say anything new, is it buybacks? Whatever it is that's bringing that up, and then of cou10rse you have Kathy Woods, who hasn't been right in the last three years, say Tesla is going to 2500 or something like that, whatever price, and Tesla is up 4%, so Mag 7's up 2%.

However, what I did note, which I think is quite sensible was Russell 2000. It was up one seven, it was actually up to five during the session. Now, small stocks are going to benefit from lower rates. Now, I really said the lower rates, which will be brought on by lower inflation and somewhat of a slowing of the job market is really going to help the smaller stocks, even though it might mean a softening of the economy, their price basically for a mild recession and they need those lower rates on the turnover. So that part was pretty good, but this was a definitely good report.

Now, PPI tomorrow will finish it off and give us the PCE already. I think Goldman Sachs has lowered its PCE by one 10th on expectation, just on the basis of CPI data, which is unusual. They don't usually do that, because they wait for the PPI data actually to come through, but this is definitely looking good.

Now, what's also looking good is take a look at the commodity market, still down. I mean take a look, look at energy prices are lower, were lower in May than they were in April that caused a zero increase. Well, take a look at the average gasoline price.

We're approaching the week. Next week is the week they take the prices for June. Do we report it in July? Take a look at the average national gasoline price now compared to the week they took it in May for the June that was just reported this morning, much lower. We could get another zero. We could even get a minus 0.1 going forward. This is remarkable on that score.

Again and if you finally have the rental part of it kicking in, well that's going to be just double good stuff that's coming. Things could always change. There's a little bounce back in oil from the lower prices that we had seen before the labor market report a week ago. But basically, the commodity prices are off their highs and that's what's really quite favorable, and the momentum is still there and there's nothing really breaking the basic bull market and the basic bull market in growth stocks.

I mean, you need multiple disappointments on that score to break that particular strong trend. Now, it doesn't mean value stocks won't go up and they've been holding their own and some sections have been doing quite well. But right now, Nvidia, Apple, Microsoft, nothing's breaking those trends just yet and earnings estimates are still doing very well going forward.

So in summary, I mean obviously, if you take a look at the relative reaction of the market to the CPI this morning relative to the actual dot plot, which was announced at two o'clock, the magnitude of the bond market move and the stock market move was like five times more.

What did they think was more important? And it was the CPI coming in as mild as it is, no matter what the Fed says. Again, the Fed can say anything it wants but it will be basically following the data. I thought Powell was very flexible. I thought he was right on. I think he finally gets it. I mean, the only thing I fear is that if we get some weakness that he'll spend too much time teeing it up.

Now, the next meeting is July 31st, which is a non-dot plot meeting. If we can get another good CPI in July, and let's say unemployment ticks up four-one, and we get with that, I think he'll tee up a cut for the September, what is it, 12th meeting if I get that one right. But that depends on a lot of data. That's six weeks away, seven weeks away.

So there's a lot of data goes down before that sort of thing, but it's not impossible. So the only danger is that, again, by the way, another unanimous meeting. There is only been I think for how many consecutive meetings has this been? I think it's one short of the all-time record that was set during the Greenspan era of how many meetings there has been without a dissent.

So, if there was another meeting July without tying the record, another meeting in September, we'll break the record. But that's pretty much the way Powell, and that's what Powell says. Powell goes around to every FOMC member and says, "This is what we're thinking. How do you think? How do you think about what we think or what I think? How can we incorporate your concerns into the statement that would make you go along with the statement?"

Well, once someone approaches you like that, you're not dissenting unless you've got real strong feelings, and that's his approach, for good or bad is getting unanimous calls on each. I mean, this was a pretty no-brainer. This shouldn't have been a close one anyways, but there'll be some closer ones coming up.

If we see inflation go down and/or weakening of the economy, you might bring about the first dissent somewhere down the line in 2024. With that, Kevin, do you have anything you want to add, and then we could go to questions?

Kevin Flanagan:

No, I think you covered it all, professor, but it did I think prove to be a great segue into a couple of questions we've got. Powell did talk about not wanting to break things and fix things. I saw come across the tape there, and we've got a couple of questions coming in. Do you think the Fed's going to be too late like they were on the rate hike side? Are they going to be too late on the rate cut side?

Jeremy Siegel:

It's possible because of his teeing up that he doesn't... So, I'm not surprising the market. Well, you got to get consensus. He likes to tee it up at one meeting and then do it the next. Well, if it takes you two meetings and data, you are already three months behind the ball.

It's a danger that he could be too late to cut if things really turn soft, he's willing to but might be a little bit too late. So what does that mean? It means we might get a little bit more softness than we should get.

Now I admit, I will say also looking at the money supply, I was encouraged in April and May to see some bounce in deposits. That's petered out. We're not going down but we're not going up. And in fact, total bank deposits have only risen so far this year at about one and a half percent or so, which halfway through the year is really not enough to support a two and two and a half percent growing economy, two, two and a half percent inflation.

Now, that's a loose relationship year to year. That doesn't worry. The good news, we're not going down anymore as we did for the two-year period between March 2022 and March 2024, excuse me, March 2022 and March 2023. Then we stabilized. We went up a little bit on a hump, but then the only way to get the money is by moving at lower rates, and so you increase the ability of people to take out loans, etc., And so on.

There was a report, someone did a report that if every small bank mark to market their commercial bank loan holdings, they would be insolvent and the number was in the hundreds and hundreds of such banks. They're just rolling it and hoping we need consolidation in that area. It's not a banking crisis.

It's not anything that is a real big downer, but it shows you where those are trouble areas. So, if we get into those trouble areas, the Fed has to move quickly enough. There is a danger that he will move too slow. He knows where to move and how to move.

He doesn't have the ideological resistance to the fictitious narrative that these were four years ago that the inflation was temporary. He doesn't have any fictitious narratives now, which is a good thing, but is he capable of moving fast enough if he sees softness, is just yet to be seen.

Jeremy Schwartz:

There are a few questions on how the election timing comes with that. You mentioned the tee up, maybe the Jackson Hole conference in late August is another place you could tee up the cut in September but-

Jeremy Siegel:


Jeremy Schwartz:

Are you getting too late for September? They start cutting with the election right around the corner.

Jeremy Siegel:

It's my feeling that Powell will do what he feels he has to do no matter what the election schedule is. He's going to step on some fingers. Some people are going to say it's political, fine. Powell doesn't need this job. He could make 50 times as much by quitting, if not much more than that, and probably will after he leaves.

So I mean, I honestly think he's going to do what's right. I mean, if we see a weakening really on the unemployment side and/or the inflation side... The best news for stock market is not much weakening at all on the employment side and that inflation going down.

Then the other thing is weakening on the employment side and weakening on the inflation side and drops. That'd be more neutral for the market and then less good for the market would weakening on the... And the drops are not fast enough.

Again, I don't think that would cause any bear market or recession, could cause a correction. It's way too early to make that call, but let me get to the bottom line. I think Powell is the type who will do what he thinks is right even if it is a September meeting, two months before the election.

Kevin Flanagan:

I think that's a great answer, professor. I've been getting that question a lot as well. I was doing a client lunch out in Chicago and the closer we get, I think more and more people are going to be asking that question. I think another one that I think is interesting is, and Powell touched upon it somewhat today, the labor market data.

There's been a disconnect between the payroll and the household survey of late and I was just wondering if you could give us our thoughts on that. Do you think non-farm payrolls are being overstated in terms of job growth?

Jeremy Siegel:

There's some sign that they're being overstated by some but not by a lot. There's been some studies and by the way, month to month I've seen huge disconnects between where household goes up and payroll goes down or vice versa like what we had last Friday.

It really is. I mean, one is a much broader survey. It's a different survey. It asks different questions. You have part-time workers, you have other workers. Yes, I do think there's more softness than the 200 and some thousand increase that we saw in that payroll, and I think Powell recognizes that. So, we could see part of that would be a reversal.

Another reason to tee up a cut, and by the way, so August is the Jackson Hole, July 31st will be the meeting. If the data keeps on going by the middle of August or toward the end of August, then he can reinforce that. Tee it up, reinforce it and do it, and he might do 50. If things weaken, he could do 50, he could do 75, after all.

How many? We'd get three or four 75 basis point jumps. That would be pretty unprecedented. Actually, I'd to get worried about that because to 75, that means things are really weakening. It wouldn't be inflation alone that would bring up about a 75 basis point cut. It'd be a big weakening of the labor. I wouldn't hope for that.

That would basically mean bad news, but he should do it if that news happens. If there is a big weakening in the labor market, he should lower 75. I mean, I think neutral is... Now by the way, the long run, our star went up. For years, the Fed thought it was two point half percent. Our star would be four point a half percent Fed funds.

Then it kept on going down and down and down to where they thought it was a half a percent. I actually thought it was zero or negative. Then in March they raised it to 0.6. Today, they raised it to 0.8, but they haven't really discussed it. It's my feeling it's between one and one and a half right now, which could give you a neutral Fed fund rate of three to three and a half, which is 200 basis points under the current Fed funds rate of 5.33%.

So there's still a lot of to get to even neutrality. By the way, no one brought out this consistency. The Fed thinks it's going to reach the 2% CPI or its BCE target. Let me just check the data here. By the end of 2026, the core PCE inflation and PCE inflation are reaching 2%.

Well, then why is the Fed funds rate at 3.1? That's when it should be back at two eight, the long run rate sort of an inconsistency there. So really, the truth is that they really think that our star has gone up even more than what they indicated. They probably think it's 3.1. I think it's probably closer to three and a half on what it should be, but that's still 200 basis points lower, and that what the Fed should be moving towards and rapidly if there's any weakening of the labor market.

Jeremy Schwartz:

A few of the questions came in and maybe we could zoom out for some of these questions. So Joe asked the question about what's the biggest issue that could derail us over the next decades. We're not just thinking about next 10 days, but looking ahead. And another, Todd asked a related question, says, "It seems like we're ignoring a lot of bad news, what is geopolitics, narrow leadership, valuations, VIX?" Any connection between those kinds of questions as for your outlook for the long term?

Jeremy Siegel:

There's always risks and there's always geopolitical risks. I don't see them being unusually high at the present time. Very honestly, the Middle East is what it is. I don't see that. I think there seems to be less risk to me in the Mid East. One of the reason oil is down than there was three months ago, six months ago.

I'm not saying we're at a solution. I'm not saying it has potential of not boiling up. It's boiled up for a 100 years and all that, but I don't see geopolitical risks as being unusually high compared to history or even the last 20 years.

In terms of other risks, I mentioned many times that I don't think the deficit is a current risk. I don't see that as a risk over the next five years. I'm preparing some data and slides that I think support my position there. I haven't finished those yet. I don't think the debt is a big risk.

I told you that I thought that the biggest risk actually is a cyber attack of major proportions that affects our entire financial system and maybe other parts of governmental systems. I'm not saying that's high, but I think that that is a risk that we should be guarding against.

Kevin Flanagan:

I think another interesting point, and I think Morgan asked this question, professor. Here we are talking about one rate cut, two rate cuts, and the question is does really a quarter point or two quarter point rate cuts make that much of a difference?

Jeremy Siegel:

No, but it tells the direction. I mean, are we headed towards something? Once they start it, it starts the procedure, and it's ongoing down. Now, but it's not going to go down to, well, they say two-eight, so you have to think about three-five, and if you're floating two, three points above LIBOR, well now it's called SOFR, the Secured Overtime funding rate, rather than LIBOR.

But let's say SOFR, I mean, Gundlach basically talked about that and he's been touting these B-rated bonds now for a long time. You're talking about 200-basis point drop and you have to ask yourself for a lot of these loans is a 200-basis point drop making them solvent or not on the commercial real estate side?

200-basis point drop on... When your prime plus eight on credit card, doesn't matter, 200-basis points, mortgage rates matter. Now mortgage rates right now a zero point, what do I see here for today? Thirty-year mortgage is 7.28, 7 and a quarter. Oftentimes by the way, you see six and three-quarter, six and a half. That's usually with points.

So I'm saying here on the zero point market, seven and a quarter, that'll go down when the Fed goes down. Now, even though I don't think the 10-year will go down much, but don't forget the duration of a mortgage is much lower than the bond because all the payment of the bond is at the end except for the coupons. Well, there's equal payment for the mortgage.

So, a lower short-term rate and a more normal term structure will probably bring that mortgage rate down a 100 basis points, 125, but we're not going to the 3% 30-year mortgages that we had during the early days of the pandemic. And those days are over.

Jeremy Schwartz:

One of the questions comes on, when you talked about the valuation, nothing stopping growth over value. Some questions on the AI frenzy, how much substance to the economy? I know people ask you a lot, are we in the tech of 2000 days, and you talk about that a little bit.

Jeremy Siegel:

I mean, I'm not an expert on that. I don't know. People all of a sudden there was GPT and now there's all these rivals. I think that's good for the world economy, that there's these rival large language intelligence programs. The question is are they going to be commoditized?

Now, the truth of the matter is that doesn't really affect Nvidia if they're in the leader of providing them, because that race will go on and it'll make profits. But how much will the other companies be able to make profits if they compete each other? If everyone has their AI model, they're going to be competing with each other and the question is how much profit can they squeeze out of it?

Now, of course, your wedded Apple has the name brand and all the rest, and if they, obviously people will, maybe only the new phones will be able to get the AI built in there and then people will be much more motivated to upgrade their cycle much earlier than they would otherwise. I think that's part of the thinking here.

But outside of that, it could be a big thing for productivity, but it may not be as big a profit center for the tech companies in terms of getting money for their AI models if there is a lot of competition. But we'll have to see how that shakes out. I still think AI is amazing. I still think AI is going to increase growth and going to allow a lot of companies to do things a lot cheaper and increase their margin profits.

Kevin Flanagan:

I think an interesting question, professor just came in. For someone that allocated to bonds back in November of last year, so that's right when we were just coming off the peak in rates, is there capital growth beyond a four and three-quarter percent average coupon rate? That's a question we get a lot with rates being here, the offset stocks and bonds, have rates risen to the point where you could see perhaps reallocations occur?

Jeremy Siegel:

Well, earlier in the year I said my long-term bond was four, four and a half, I've extended that. I'd say I can't go with a fifth. Long-term, I'm going to make it a 100-basis points, four to five. I think we're in the range of the long run rate, so you're going to get four to five and two and a half percent inflation, four to five, this is not really exciting in terms of real return.

The tips, the tenure tips right now is 2.08, so it's a 2% real return, while stocks are priced at least five, so…percent real return. So there's a differential. I think long-term bonds are within their range. Of course, normal volatility will bring them out of their range from all sorts of circumstances, but I see that as a long-term tendency for the long bond.

Jeremy Schwartz:

One question coming back to the monetary policy element is has the transmission mechanism broken down with we've been high for long. Is it that we're just not as restrictive as we thought, is just taking longer? Any other views on the transmission mechanism?

Jeremy Siegel:

Well, no. I think the transition is there. What's happened is that the neutral rate has gone up a lot. We're not as restrictive as we thought. When our star was 0.5% or zero, then five and a third is really restrictive. But because of a number of factors that I've enumerated, namely the fact that inflation risks are there, raises our star, the fact that faster potential growth in the future raises our star, it means that five and a third percent, which is where we're at right now, it's just not as restrictive.

It is still restrictive, and that's what Powell said today. It's still restrictive. There's no one, I mean, the maximum, if you take a look at the dot plot, the maximum long run is 3.75. So, we're one point a half percent above the highest FOMC estimate of what the long-term is. That's restrictive.

So we are in a restrictive mode. Why it's taking longer is that we are not as restrictive as we used to be when our star was zero. That was super restrictive. When our star is two or one and a half, then you're just not as restrictive, and it takes longer.

Well, basically what's happened is that so much of the economy, and the tech sector is so strong and certain parts of the service sector are so strong and healthcare employment continues to be so strong as aging in society. All of those are continuing to plow ahead and those sectors that don't get that growth, like real estate and selected real estate sectors and particularly commercial real estate, get to unfortunately suffer.

So everyone else says, "Hey, I'm doing well despite these high rates." Well, there's others that can't keep up. They're dragging that high real rate along, and the Fed has to react. But no, nothing has changed. What has changed is the real rate is not constant, our star is not constant. It moves around. It just has gone up. But I don't see anything broken really about monetary policy.

Kevin Flanagan:

So last question from me, professor, and I think this is a good one, waited, saving maybe the best for last. A question about the yield curve inversion, we've been inverted for quite some time now. A, is this going to go down as a period of yield curve inversion where it did not predict a recession? Or do you think a recession is still out there somewhere looming ahead the next 6, 12, 18 months?

Jeremy Siegel:

Possible, but less than 50/50 probability? I mean, I think one of the things that's different is that... And actually, we've had some Fed members actually talk about it also, is the fact that inflationary expectations never got out of hand during the inflationary episode that we had. That's a big, big situation that really causes a recession when you're trying to bring down inflation.

And Austan Goolsbee had a big seminar, and he's the Chicago Fed guy, friend at the University of Chicago and Chicago Fed guy. He's given some seminars on this issue, and it's something I pointed out also. So, I would say it's not impossible. I mean, it would be 60 years that we haven't had a recession following an inversion, but it doesn't mean that it's impossible because of the unique qualities of the inflation and the recession that the COVID pandemic cost.

Jeremy Schwartz:

Well, Professor Kevin, it's always great doing these market calls with you all. Thank you for joining us. Once again, there's a number of questions on…and others that we can follow up with people individually on things like alternatives and the role of gold, the role of the dollar in portfolios.

We do a lot of publishing on all these topics, so we'll follow up with some of you individually, but professor, always great to be on with you, Kevin. Thanks so much for doing it and we'll talk again.

Jeremy Siegel:

We'll talk to you soon. You keep in touch. As you know, we have weekly podcasts every Friday and we publish them on Monday.

Jeremy Schwartz:

Behind the markets for staying in touch with our weekly views. And of course, you go to our strategies page, you get the professor's commentary every week from there, as well as a lot of other great dashboards and insights. So stay in tune for that and let us know how we can help. Thank you so much for dialing in today.

Kevin Flanagan:

Take care, everybody.

Jeremy Siegel:

Thank you. Good weekend.