WisdomTree Events: Hi, everyone! Thank you for joining WisdomTree's Office Hours on Fed Watch with Professor Jeremy Siegel: Between a rock and a Hard Place, where you'll hear from Kevin Flanagan, our Head of Investment and Fixed Income Strategy, along with Professor Jeremy Siegel, WisdomTree Senior Economist.

Kevin Flanagan: Thanks, Irene. Good afternoon, everybody. Professor, we thought we had a Fed day. We just got bombarded with some earnings that came out as well.

Jeremy Siegel: I think many of you have seen it. I mean, Microsoft up 3.6%, Meta down 2.8%, Alphabet down 3.7%, and Amazon flat. They're moving around a lot.

I mean, no huge, huge move. Amazon's down 3%… now Amazon's at three and a half. So, I mean, they're almost kind of a net wash, if you want to average those four in terms of percentage changes.

As I'm looking at them on the screen—I guess many of the others have it on the screen—it doesn't look like… now, obviously, they're going through it, and obviously there are going to be phone calls, and the guidance is going to be important. But at this juncture, I don't see anything really like up 8–10% or down 8–10%.

At this particular point, these earnings are coming in not far from expectations and don't seem to change the narrative as I am looking at that. Now Amazon's down 1.2%, 1.5%, so you can see they're bouncing around pretty much flat.

Let's keep our eye on that, and I'll report, but at this point, let's go to what's going on at the Fed.

Goodlock is on commenting right after, as he does at CNBC and then he says exactly what I said 2 weeks ago. It's more likely the Fed is going to raise than not. I said the same thing, and they were shocked.

It made a headline on Bloomberg, actually. Alright, well, all right, so let's basically talk. First of all, it's exactly what I said also on Monday on CNBC, that Powell is not completely satisfied that he's cleared and has no intention of stepping down right now. I think that Trump administration can make a deal with him, or we will clear you completely with promise of no further, and then he'll step down, and then Trump will get a pick.

Because without a pick, Trump has no possibility of really making a lot of headway on his, it's going to be hard, even with a pick, to make headway on lowering rates at this particular juncture. I mean, I… I don't know, I mean, you… oil… I mean, Brent is now at 119.80 Up, 8… almost 8%. WTI is up a 107.

Wholesale gasoline… Wholesale gasoline prices today are up 20 cents a gallon. That's a 20 point… that's at least a 20 cent Plus, retail move in one day. I'm just telling you where they're going – and that's up big time.

Okay, right now, by the way, Amazon flat, Alphabet up 4%, Microsoft flat, and Meta down 6%.

That's the current interpretation of what's going on.

But, more importantly, going back to this. Who's going to cry uncle first? When you see gasoline prices rise, they went up to about, $4.20, dipped down to around $4.05, now they're going to, they're going to go up to $4.50. If this continues on, they're going to go to $5.

$5 is bad on headlines. It doesn't mean it's going to crush the economy, but it's bad on headlines. $5 a gallon headline going into the midterms is not what Trump what he wants.

We can talk about who's going to cry uncle first. Even though the effect of that, really, it's headlines. It's headline in politics, more than that it's going to crush the economy.

$5 gas doesn't crush the economy. In the U.S. sense, but I'm just talking about the political ramifications here.

Now Mirren, of course, wants [rates] down, and he has [them down], but he's leaving. So, what allies does Trump have to move it down? He's gone. I don't even think he's at the June meeting coming up. So, there were 3 dissents on the bias, the move to neutral bias.

You know, if you listened to him, he said, yes, it was definitely a movement towards neutral. We're not there. Maybe he decided to leave everything the same for Warsh but what his motivation was is not certain there.

He did say, and the market rallied on this, no one's talking about a rate rise. I mean, they're talking about neutral bias, which means the probability of rate rise is equal to the probability of rate fall, approximately, but no one is saying “I want to raise rates.”

“I think they should be raised now.” No, he did say that. Markets did actually rally on that.

The real data is good. Durable goods were strong. Retail sales were strong.

Goldman Sachs has raised its first quarter GDP number now, and they're conservative to 3.5%. Which, I didn't see whether, you know, I didn't see St. Louis needs to revise it.

They're below 2, but I think Goldman Sachs is 3.5%. Now, don't forget. That covers March, and prices were just beginning to rise at the pump.

It's nothing like what's going on in April. And what might likely go on in May. And might likely peak during Memorial Day, which is one of the biggest driving days of the year, But that is that is basically in the future.

I would say that these three dissents show that the feeling on the committee, there's no appetite for a cut without some big change, so I don't know how Warsh can engineer a cut.

What is really interesting: July Fed funds, which represents the June meeting, is at 363 and a half. January 27 Fed funds, which represents the end of the year meeting, is at 366 and a half.

Right now, the Fed Funds is 364. I've never seen it so flat. Now, you have to understand that the forward rates and the futures rates are downward biased, so actually the expected value was above that, but let's just take that at face value.

At face value, there's no cuts. There's no cuts built in whatsoever.

Consumers are still spending. The build-out of AI is definitely a positive on the construction and pushing of the economy. Consumer sentiment is at or near an all-time low, which is very unusual for consumer spending to hold out with consumer sentiment at an all-time low, but it's possible, and it is. Will there be a tipping point?

For $5 gas. Where people are saying, you know, I mean, I'm going to postpone. They're going to see other price rises, as we know, there may be food price rises, transportation price rises, airfare rises, et cetera, and so on.

Near-term, this does not look good. Unless we get movements through the Strait of Hormuz, it's going to keep on going up. This is one of the biggest increases we've had, and it's not the bombing. No new start of hostilities So, this is quite an interesting situation.

Again, the U.S. economy is net. Ther is very little influence, because all the losses to consumers of buying higher stuff are offset by revenue to the energy producers, which are going to be really high. Natural gas is staying low, if not lower. Major source of a lot of people's heat, air conditioning, energy, etc, and so on.

Of course, not at the pump, but there is the psychological effect of those. Also, the weakening of Asia, importing all their oil and possible strife with China. They have a huge reserve, which they're taking down so far.

They haven't made big noises, one way or the other. And what they're getting, what they're not, is really uncertain, as far as that's concerned.

The 10-year is up a little bit, probably 2-3 basis points off of before Powell. The stock market closed before these, all these announcements, by the way, it's, Amazon down 4%, Alphabet's the only one up, Meta down 6.3%, and Microsoft down 2.8%. So, Alphabet is the only one, it's up 1-6%, The others are drifting down, so, looks to me, unless we got a big turnaround on the… that, that then it's settling in after 15 minutes.

We'll see. It can change on the conference call.

But, when we look at all this, it just shows that high expectations are really built in. Obviously, we all know that, on all these, and you've got to really beat with a big margin in order to do better.

Kevin Flanagan: Professor, we've gotten a whole host of questions, and I thought this would be a great way for you to kind of summarize and provide some perspective that, for all intents and purposes, and barring any unforeseen circumstances, all those little caveats. Come June 17th, we're going to have Chairman Warsh, and there's just so many people trying to determine what can he actually do.

Jeremy Siegel: Very little. So, this is what it can do. I mean, first of all, he's feeling his way as chair, although he's been on the board.

He's one vote, there's no veto power. He can state his case. I don't know how he's going to approach it, it depends on what happens in the next 6-8 weeks.

But what can he do? There's nothing he can do independently. He needs a vote, and certainly from the votes today, we see he doesn't have a vote. Unless the economy falls apart and all of a sudden consumers just fold.

If consumers fold, he's got a case, and others will agree. But, unless consumers fold, of which they're showing no sign. or firms aren't letting to go many people, and we don't see that from jobless claims whatsoever, and we don't see that even from the payroll.

We don't see that whatsoever. There's absolutely no chance of a rate cut in June.

Kevin Flanagan: Now, how about just the framework of the Fed in general? People talking about, maybe he wants to get rid of the dot plots.

Jeremy Siegel: Yeah, he might, he might, he might. First of all, I don't think it's going to happen at the first meeting. They're going to have… because he's actually, you know, so, they're going to be the normal dot clouds.

Over time, yeah, they may be modified. I'm… so, you know, hey, that's secondary. I mean.

Yeah, they move markets, and he might change them and modify them, maybe only… I always said what you should do with the dot pots is just do the next 2 or 3 meetings, forget about this 1 year, 2 year, three years, you have no idea what's going on. And then some idea of what the neutral is. I mean, maybe some idea of the long-term forecast of what you have. I think the short-term forecasts are… are not all that informative. A lot isn't, but I think I had intentions of the next meeting.

It should always be the next meeting and maybe the end of the year. That should be the two dots you look at, if you're going to want to do that at all. Now, he doesn't even want that, because he says, we don't know, and he's right, in some sense.

I mean, if they get rid of them completely, I mean, our central bank operated without the DAPL for 100 years, so, I mean, we can do it. Would that change anything? No, not really.

The criteria by which they move up and down rates is… is not changed. The mandates by Congress of what the Fed should do is not change. So, you know, yeah, I could talk about all the things he could do to get rid of the dot plots, and okay, I can write a dissertation on each of those, it doesn't make any difference.

It doesn't make much difference, really. Doesn't make any difference for whether the rates go up or down, what he considers neutral or not. the Fed's flexibility or not, It's all very secondary.

Kevin Flanagan: Question just came in, how about the balance sheet?

Jeremy Siegel: Yeah, he wants to reduce the balance sheet. I made a statement, and I made it over the last 20 years, that of all, you know, we have two things the Fed can do. Change the balance sheet and change the rate.

Changing the rate is 10 times more important than changing the balance sheet. I can talk about it, but it's not important. It's not that important.

And there would have to be a long-term plan developed over 6 months on doing that. There are a couple people that are talking about it. I've been in favor of reducing it also, but it doesn't change.

The rate is the rate. The most important thing is the rate. The Fed funds rate is THE thing.

I totally disagree. There's a number of monetary theorists that say, oh, you know, the balance sheet is as important, or maybe, you know, I mean, no, no, it isn't. No, it isn't.

balance sheet and all that had nothing to do with keeping rates low too long or any of that. These are people that don't really understand how monetary policy is implemented, but that's okay. I don't like the balance sheet going up too, because there's signals that are in the Fed funds market that doesn't exist.

Something that I've written about, and all that, but you know what? That's long-term. That's not happening now, and that's not at all relevant to what's going to happen to the markets in the next 3 months.

I mean, I can talk about it. I could talk about it for an hour, if you want. I mean, you think it matters?

I man… People will talk about, oh, what is that, a big change? And all of a sudden, we're going to see the Fed funds go, rate go to, what, what, 5 or 1 and 3 quarter? What?

The Fed funds rate is… the deal. That's the deal. Everything else is secondary.

Kevin Flanagan: It's an important message right there. You know, before we went to the Middle East War. all the talk is about AI disruption for software, maybe the Halo trade.

Do you think we're going to start coming back to that if we have these continued de-escalations and, say, eventually the Strait opens? Are we going to come back to the AI disruption software story?

Jeremy Siegel: Well, it's already there. I mean, that's what's… I mean, yes, I mean, Iran and the oil is sort of overpowering that, but the major secular and immediate theme is this AI revolution. Which I think is real, I've said that, I think it's very positive.

I mean, it will churn the markets a lot, but net, it will be a big positive. I mean, this, think of it, if we get 3.5%, which is the current estimate, we're going to get GDP at the end I think next week, is that right? GDP comes out next week? For the first quarter?

Kevin Flanagan: schedule ever since the government shutdown a little.

Jeremy Siegel: No, yeah, but it's pretty much… it's pretty much coming back on schedule. Let me… let me just see, I mean, in terms of the first quarter, I'm going to look on… on, on GDP. I mean, I should have it in front of me.

But, GDP annualized first quarter estimate is going to be on the 30th. Oh, was that tomorrow? Oh my god, so it's even tomorrow.

Wow. I didn't even realize that. It's that soon.

So, the estimate here in Bloomberg is 2-2. It's interesting that Goldman is 3'5". Wow.

Someone's making a big mistake here. I… I think Goldman is good. I mean, 2-2 is decent.

I mean, it's above what, you know, the long-term 1.8 estimate that we know is, embedded in the Congressional Budget Office. 3.5 is quite a bit above that. 2-2 is not bad, given, you know, the level of of hours that is being spent, that's… that should be a good productivity number, even with 2-2, but there's a big gap there.

So, tomorrow, we're going to find that out. Personal consumption is lower, 1.4. We know investment is going to be strong.

Housing starts, by the way, was strong. Everything was strong, durable goods was strong, retail sales were strong, I mean… There's very little that is not strong. And getting stronger.

The only thing is the psychological You know, hit on the consumer. From, you know, complaining, you know, I mean, the press is obviously going to play up all the higher prices. that we see, one way or the other.

Okay, I'll give you an update. Yeah, they're all down to… I guess they're all down except, what was it, Microsoft. No, they're all down except Google.

Google's up 4%, so… but nothing is… on balance, the MAG7 looks like they're just slightly soft, so this is what.

Kvin Flanagan: So, you've been writing, a lot lately, and in some of your comments about equities, where they're going here. Have we gotten to that point where you would now begin to say, hey. We have a re-entry point.

Jeremy Siegel: I have been positive on equities. I was cautious at the beginning of the Gulf War. Yep.

And we did almost have a correction. We almost went down 10%. We went down 15% in NASDAQ, I think, 10% on… almost 10% in SP.

But we come back. I mean, unless OIL goes to… I mean, if oil goes 130 to 150, And then you get oil… then you can get gasoline at 5+. I think that's going to happen, because I think then the 10-year goes to 4 and 3 quarters and 5.

It puts pressure on it. I'm not saying that it would stop the bull market. The bull market, there's still money flowing in.

I mean, there's still… a push on equities. Equities look good, the earnings are, on the whole, excellent, and the push towards equities, and we know equities are good long-term inflation hedges, so, you know, they're going to… they're going to make up for that. The only thing that'll pressure them is interest rates going up, and that… You know, that… that… that would keep the stock market in line, but I… this is… you can tell by the action, this is a stock market that wants to go up.

There'll have to be a lot of negative hits for this… market, I think, to go down. It just wants to go up. There's enough liquidity, enough buying.

Enough feeling that this is a revolution, that is going to increase profit margins, profits, and incomes. And GDP for everybody. I mean, I think that's the… That idea is still there.

I, I, you know, I am bullish right now. I see the risks. But I'm bullish.

The negative on the consumer is offset by AI, and, by the way, war spending, and we talked about that. War spending. We need to replace missiles.

We need to replace, and increase aircraft. We… you know, we need to do a lot of… a lot of things now. We have to really invest in anti-drone and drone warfare and all sorts of stuff.

This is going to increase spending across the board. More government spending.

Kevin Flanagan: I know that's been an area at WisdomTree we've been focusing on with strategies on the defense side, and new funds coming to market, for sure. So, if there's… if you're… want to get involved, but you want to hedge yourself a little bit on the equity side. Is there a sector that you would not Go towards, or… not say it's a third rail, but just, you know, maybe take it a little light.

Jeremy Siegel: Well, you know, I'm not… I think interest rates are probably going on the upside. If you think finance… some financials might be hurt on some banks might be hurt. It depends.

I don't… however, you know, they've been sold down. I don't think there's a general credit crisis in the banks at all. I don't think there's, you know, any, you know, hidden stuff that's bad.

You know, as far as that's concerned. So it's really hard to… I mean, those interest-sensitive. You know, I mean, mortgage rates are just not going below 6.

They went below 6 for about 3 weeks, and that's it. So, remember something, and I think it's important. When did the Fed start reducing rates?

A year and a half ago, was it, Kevin? Yep, yep. And I said the long rate is not going down.

Everyone was predicting, oh, now… What has happened to the long rate, the 10-year, since the Fed started lowering interest rates? It's gone up. I said all it's going to do is write the inverted term structure, and that's exactly what's happened.

This idea… I remember people saying, oh, we can get all the boost from that. No, we're not going to get any boost from that. And by the way, if there's more inflation, you know, even if they tick up the interest rate a quarter point, a half point, you're not going to get any interest.

What you're going to lose on inflation. So don't think, oh, yeah, you know. I'll make it up on cash.

You won't make it up on cash. It's not going to go up enough to offset this inflation. You need to be in real assets here.

You know, whether it be stocks, or… Or whatever. Now, would you want to be in tips rather than that? But, you know, real rates could go up, too.

Real rates are 1-9. I mean, increased government spending raises real rates. That'll depress your tips.

So you've got to watch out for that. If the Fed starts deciding to raise real rates, or they decide the neutral is above, you know, the, you know, 3.1, 3.2% level that they think right now, I think they may jump it. If we've got adopted in June.

You know, that raises real rates. So all this push, something that will raise real rates, not good for tips, and worse for bonds. And cash will go up, and only if the rate goes up and real rates go up enough to offset the good earnings that we'll get from the push on the fiscal will stocks really go down.

That's the kind of a scenario I'm looking at now.

Kevin Flanagan: So, we're almost up against time. Question just came in. I know your answer, but for everybody else on here, is the Fed going to raise rates this year?

Jeremy Siegel: More likely, they'll raise and lower. I'll give you, I should give you the probability of 50%, because then I can never be wrong on that. I just will say what I said two weeks ago, and I was one of the first to say it. More likely, I think, we'll get an uptick.

It's not overwhelmingly more likely. It's not like this is a slam dunk, it's more like. You know, I mean, I'd say it's like 55, 45, or 64… I mean, these are pretty close in the world of chance.

But it's more likely… Given everything I see out there. That the tick will be up rather than down.

Kevin Flanagan: All right, that's… I think that's a great way to end it, Professor. Thanks again for coming on. We always appreciate your comments and your insights.

Jeremy Siegel: Thank you very much, Kevin, and We'll see you again when the really interesting June meeting, when Kevin Warsh takes over as chair of the, Federal Reserve.

Kevin Flanagan: New sheriff in town, Professor.

Jeremy Siegel: Absolutely.

Kevin Flanagan: Alright, everybody, have a great rest of your day.

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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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