WisdomTree Events: Hi, everyone! Thank you for joining WisdomTree's Office Hours with Professor Siegel on Fed Watch. It's Warsh's Party Now, where you'll hear from Kevin Flanagan, WisdomTree's Head of Investment and Fixed Income Strategy, along with Professor Jeremy Siegel, WisdomTree's Senior Economist.
Kevin Flanagan: Thanks, Irene. Good afternoon, everybody. Well, here we are, Professor, finally! The changing of the guard has come. And Kevin Warsh is now leading the charge. It's not just a shift in policy messaging — there are some changes coming down the pike. So, let me just hand the floor to you and take us away.
Jeremy Siegel: Yeah, absolutely. Well, we saw it immediately with the statement, which was almost two-thirds shorter than usual, dispensing a lot of sort of repetitive and maybe unnecessary content. No guidance. That's the big change, and not a surprise. Of course, the dot plots were aggressive, more than expected by the market — that's why you see the 10-year yields up 7 basis points and the 2-year yields up 13 or 14. They were definitely more aggressive than anticipated. As expected, Warsh withheld his dot. He signaled that the dot plot as it is may be reformed, but not immediately. So it appears that things are going to remain status quo in terms of structure, which I think implies news conferences even after the non-SEP meetings — the dot plots and the SEP projections will continue. However, he appointed 5 new committees, one of which studies communications, one of which studies inflation, and a number of others. They are going to report at the end of the year. The Charter says he doesn't have to change anything till the end of the year, and after they report, maybe it will take a couple of meetings to digest it, and then we'll see what kind of new plan, if any — I'm sure there will be some changes — actually takes place. But it's not going to be sudden.
What stuck out the most is the statement: "We will deliver." We are mandated to deliver low and stable inflation, which we call 2%. He did not say he wanted to deviate from that, and he repeated several times, "We will deliver." Someone might have asked him, well, is there any other way of delivering other than raising rates? No one did, but there isn't. The balance sheet alone is not going to do it — in fact, the signals from the balance sheet are that he's not going to make any radical change right away, although that is part of the committee's mandate to look at. But that's going to be a really slow change.
Let's look ahead. Trump tweeted — he held rates, whatever — I would have preferred maybe lowering rates, but I'm not going to start ragging on them right away. It wasn't a big objection, it wasn't any sort of endorsement. He's hanging back, at least at the present time, obviously having more things to worry about with the Iran agreement than what Kevin Warsh did on his very first day.
Let's talk about what is going ahead. I see right now on oil, WTI, it's 76.01. Very honestly, I'm surprised to see it as low. I thought it was going to stay with an 80 handle, because of the mess not being cleared and all the storage in play — but it's gone down a lot, a lot faster than I thought. Now, this means inflation's going to go down. This is going to bring up a very interesting dynamic over the next 6 months, because I think month-to-month, certainly headline inflation, is going to definitely go down. It's going to be 1%, there may be zero, there might even be — depending on how fast gasoline goes down — some months that are negative. So how is he going to increase rates? Trump would blow his lid if inflation starts going down rapidly and Warsh starts raising rates. Now, Warsh is going to look at the core rate, to be sure. And that's where the stickiness is present. We do know that regular inflation does bleed into the core, because core has been elevated, and will start bleeding out of the core a bit as oil stays down — which I imagine it might.
By the way, just going back on Iran, I think the ceasefire is going to be kept on being extended. There'll be details out, but I don't think the fighting is going to start again. I don't think this is a good agreement, at least really early on, and we haven't seen the final MOU yet. But it will bring oil prices down, and basically that's what the American voters care about — more than some theoretical question about whether Iran will or will not get some nuclear weapon in the future. So you can see the impetus there. But I doubt that there will be another war, so we could get those inflation rates down. Then the question is, how is the Fed going to raise rates if the core remains sticky while commodity prices go down? I think the board cannot really raise rates by the end of the year. Of course, if core still stays stubborn, he could raise them maybe in December. But that's where I think the conflict could come — where rates are rising and inflation's going down. How are you talking about raising rates? And that's going to be a problem.
My feeling is I thought he did a good job answering the questions in the first meeting. He actually held the meeting almost to the length that Powell did. He said at the beginning he was going to hold it to 20–25 minutes, but it actually went well over a half an hour — although it was his first meeting. I also liked that he really emphasized the comradeship and good discussion. There was no criticism. He praised the other FOMC members. He's not going to be a confrontational chair. He's going to cause people to think and argue, but he himself said that he was impressed with the level of conversation, and that's good. And he's going to change a number of things. I like the fact that we need to rely more on real-world data. The old thing is we were all relying on a lot of data, including the labor market reports, which are often revised, and whose participation rate keeps going down, so there's more error. He's trying to get new data. This is very good. I think a lot of his initiatives are extremely good, but it really gives him time. I don't think we're going to see any major changes until these committees come out with a report by the end of the year, and then maybe only in January will we actually see the changes.
Assuming Hormuz opens, we could see oil drop to 60 because everyone's pumping more. 60 was the level of oil before the war. I'm not an expert on the oil market to know where it would go with a little bit more pumping everywhere. Will China start importing 4 or 5 million barrels a day more? That might tighten things up a little bit. But it has fallen more than I would have anticipated at this particular stage of the negotiations, which means there's a lot of oil coming out and a lot of oil moving around at the present time. As far as the market's concerned, it's really just adjusting to higher interest rates. Could this break some of the speculative fever? SpaceX looks like it may have temporarily peaked. There's a lot of speculative money in the market, and of course, anticipation down the road of Anthropic and OpenAI — almost everyone made some money on this, whether you got an initial allocation or bought right away — and a lot of people participated. So there is a good feeling as far as that is concerned.
The market's expensive. The weighting in the AI sector and communications sector — I now said we should call it the MAG-8, right? It's not MAG-7 anymore. Unless you want to drop Netflix or one of the MAG-7. We should call it the MAG-8. SpaceX is as much a MAG as any of those other companies, and we make it to the MAG-10 once we get OpenAI and Anthropic in there, and you're really very highly weighted. Which is why there's more and more talk about alternative indices that are not cap-weighted. I heard about this a lot at the top of the dot-com bubble, but there weren't many available. Now there are more available, and people are talking about that if they don't want to be that concentrated.
On the other hand, the future of AI is very, very positive. Warsh was asked a question about whether AI was a deflationary force or not. He sort of skirted around it, didn't want to commit one way or the other. One should mention that the productivity data of the last two quarters has not been great — Q4 of '25 and Q1 of '26. The trend in the last 2–3 years is good, but the last 2 quarters have been weaker, and we'll see what this quarter brings. This quarter's GDP looks like it's converging — the Atlanta Fed, which was up in the 3s and 4s, is now down to the high twos, and Goldman Sachs, which started in the high ones, is now up to the mid-2s — so pretty well converging on 2.5. There's still a lot of data to come, but that's basically the divergence.
Kevin Flanagan: So, Professor, we had one member decide not to do a dot plot, and Warsh made sure that mystery didn't last very long — came right out and admitted it was him. 9 out of 18 for a rate hike this year. What do you read into that? Should we read anything into that? Or do you think it was maybe some of the presidents, some of the governors just trying to make their own little hawkish statement?
Jeremy Siegel: A lot of these dot plots are a week or two old, and facts on the ground can change quickly. Just the fact that oil has come down so much more than most people projected does change some of the inflation trajectory over the next 6 months. Warsh hinted at that — when he said they're "in pencil." Maybe if it was a week ago, oil was 90–100. Now that oil's 70, that takes at least a half point off of CPI over the next 6 months if it stays at that level. Things can change on the ground very quickly, and in fact the projections for the next 6 months are very much up in the air. What I think is the interesting thing is that headline inflation is going to go down below 2% on an annualized basis, while core will remain sticky. The Fed is supposed to look at core. Trump will be looking at headline and say, how could you even think about increasing rates, and could get quite agitated if an increase happens when overall inflation is going down — especially if there's even one month of a negative print, depending on how fast it does go down. I see potential conflict down the road. The Fed is going to be in a more difficult position. Those people that want to hike the rate are going to be looking at CORE. We're going to see how CORE reacts. All those sticky prices — is there still excess demand?
I talked about the fact that I see the M2 money supply growing at a faster rate. By the way, I do praise Warsh. You may have heard him mention Milton Friedman — not in the context of the money supply, but supply and demand. He's a good economist; he knows his classical economics. I pointed out that we've had a little bump up in that M2 money supply over the last 3–4 months. We had a little bit of a drop last week on the deposits — we'll see if that continues. But that little bump up helps push those prices that went up and keeps them up rather than making them tighter.
Kevin Flanagan: So, Professor, I know people used to call us Fed Watchers back in the day, and maybe that's something you can put on your resume now going forward. We're used to a world where the Fed didn't provide forward guidance. And now we're getting to a point where everybody has been so used to the last 10–12 years of the Fed being rather open with their forward guidance, and now we could be going back to the future a little bit. Do the markets have some sort of problem with that?
Jeremy Siegel: We’ve got to be careful. Yes, there is the dot plot. How often do they stick to that dot plot? Have you seen the actual versus the dot plots? Let's be honest — yes, they're giving a path over the next two and a half, three years. How often do they follow that path? It's the facts on the ground, the facts that are actually happening at that meeting and over the past few weeks and months, that determine whether they're going or not. So maybe he's not doing away with them, he may reform them, and that's not going to happen until next year anyway.
The big difference — and we don't know this yet — is that Powell was very careful that going into the quiet period of a meeting, if he thought the market had it wrong, he'd make a speech to get them right. You could call that correcting the market. We don't know whether Warsh would do the same thing. He sometimes talks about surprise. But we're not there yet, and with no change this meeting, it was not a test of it. In other words, if the Fed funds market sought one hike or one cut, and Powell said, I don't think that's happening, he would make a speech and move those markets back in line. But you and I have both followed what's actually happened, and it's almost a joke about how much the dot plots deviate from the actual path of the Fed funds rate.
Kevin Flanagan: Do you think it creates more volatility in the market, at least at first, as people get used to this new way of communicating?
Jeremy Siegel: There's been a debate about that, but he hasn't done away with anything yet. This might happen 6, 8, 12 months from now. But basically, I think he's called for status quo on policy communications for the next 6 months. Now, maybe he won't make a speech or try to give guidance or correct the market the way Powell did. But he in no way is restraining the other 18 members of the FOMC from speaking about what they think the rate should be. And there's going to be a dot plot in September and one in December. What's going to happen after December appears to be the result of the committees he's formed, the recommendations they make, and what is adopted by the FOMC. So, I really think it's going to be status quo for 6 months. The only difference is whether Warsh will chime in if he thinks the market is wrong, but other Fed members will chime in too if they think the market's wrong.
Kevin Flanagan: So, when I sat on the trading floor, we used to always have the expression, the other side of the trade. Is the other side of the trade now rate cuts that nobody's talking about?
Jeremy Siegel: That would be a big deterioration of the labor market, and we just don't see it. I'm anxious to see jobless claims tomorrow. There's been a little bit of an upward trend — it's moved from the bottom of the range of around 200, up to near 240, near the top. But the ADP reports have been fine, no other reports are going up, and there's tremendous stability everywhere else. You don't see it. But yes, the rate cut option is there. By the way, Warsh did not deny the dual mandate. He said right away, the dual mandate. Some people have said he's going to do away with the dual mandate — he cannot. The dual mandate is congressional law. He has no ability to do away with the dual mandate. He can obviously make a recommendation to Besant to Congress to do away with it, but he cannot unilaterally do away with the dual mandate.
Kevin Flanagan: So, if we go back to the other side — a rate hike. If the Fed raises rates, is it for a good reason, so the equity market maybe can shrug it off?
Jeremy Siegel: We hope inflation goes down on its own, so if we don't see that core rate going down, he's going to have to raise rates — but it's not a good economic situation. If oil doesn't bleed into core in a way that lets us hold longer, that's going to be something that the market's just going to have to contend with. We could ask the question: was 25 or even 50 basis points enough to kill a rally in the stock market? Again, they won't raise it if we see deterioration on the labor side, but if things really start picking up — speculation and all the rest — then he would be forced to raise the rate. It's the context. He said "we will deliver," which means you’ve got to raise rates. And I'm actually thinking of that potential conflict with Trump later on, because he may be raising rates in a declining inflation environment, which I could see causing tremendous friction between the Fed Chair and the Presidency.
Kevin Flanagan: So, we've gotten some questions. Something that came in had to do with sectors. Any sectors you would say fall into favor or out of favor if the Fed does begin raising rates later this year, early next year?
Jeremy Siegel: All the interest rate sensitive ones. People talk about housing and rates, but the truth of the matter is, if you fight inflation, you actually keep the long rate lower than it would otherwise be. If you give in and start lowering rates, you'll see the long rate go to 5%. There are a lot of short-term loans and credit that are affected dramatically. The Russell 2000 was quite a bit up, but it's come down. We've got the 10-year TIPS now at 2.21% — earlier, a month or two ago, it was 1.92% — so what they're doing is capitalizing the cash flows at higher rates. So, anything that has those cash flows, anything that's sensitive to short-term borrowing costs — installment credit or whatever else. Credit cards are based on Fed funds. So, you could talk about those sensitive to short-term interest rates. But I can't really say that long-term interest rates are necessarily going to be that much higher if the Fed is committed to fighting inflation.
Kevin Flanagan: Another question: does a 5% 10-year Treasury yield spook the stock market?
Jeremy Siegel: We're at 4.48%. If it goes up to 5%, there will be a sell-off.
Kevin Flanagan: Should we be looking more at real yield versus nominal yield?
Jeremy Siegel: In the short run, real and nominal yields look pretty much the same. We had an increase of about 6 basis points in nominal yields on the 10-year, and the 10-year TIPS was about 7 or 8 — pretty close to the same. Which means the expectation of tightening is raising those real rates. So, the push is actually raising real rates. Inflation expectations actually dropped, because the difference between those on the ratio is actually a drop. And that's it — it's saying, "We will deliver," stated 3 or 4 times on his first day. That's good. If he doesn't deliver, that statement is going to be brought up to him repeatedly in the future.
Kevin Flanagan: People were talking about higher energy prices being a tax on the consumer. If oil sustains a fall to $70 or $65 per barrel, should we consider that a tax cut?
Jeremy Siegel: We're back to where we were. The day before the Iran war, we were at 60 on oil. If we get back there, that's a positive — absolutely. I would be surprised, because it means there was a lot of increase in output — given still-active shipping, given some of the production and oil-producing sites that were damaged in the Gulf region, given that we're stocking up again and filling the reserves. That we could go down to the same level of oil as before with the same economic activity — if we have a recession, we're going to have lower oil, but given that we don't, that would be pretty astounding. And it shows a resilience of the oil market on the supply side that very few people, including some of the experts I consulted, thought were possible.
Kevin Flanagan: So, we're pretty much up against the 30-minute mark here. Any final thoughts when we're looking at this new leadership?
Jeremy Siegel: Any thought that he was going to be like Steve Mirren and be kind of a yes man to Trump on lowering rates is totally gone. You absolutely see that's not there. He didn't even open it up by saying, gee, if oil comes down, then maybe we don't have to raise rates. He could have made some statements showing some responsiveness in that direction. I did not hear any. So, taking that off the table — this is catnip for the market — you move that catnip away.
Kevin Flanagan: Good stuff, Professor. Thanks again for all your thoughts. We have new leadership at the Fed, something new for us to talk about. No more ham on rye, right, Professor?
Jeremy Siegel: Absolutely, yeah. It's refreshing, and I guess in 6 weeks, as he mentioned, we'll see how that settles in.
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