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Calls for an "emergency rate cut" are growing! Wharton School professor calls on the Federal Reserve to cut 75 basis points first and continue next month

2024-08-06

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Global markets fell in panic after the release of last Friday's disappointing non-farm payrolls report.

Wharton finance professor Jeremy Siegel called on the Federal Reserve on Monday for an emergency 75 basis point rate cut. He also said that the Fed should "cut rates by another 75 basis points - and that's the minimum" at its September meeting.

"The current federal funds rate should be between 3.5% and 4%," Siegel said. "When did the Fed ever understand the economy? The market knows more than they do, and they have to respond."

The Federal Reserve kept interest rates between 5.25% and 5.5% last week. The employment report released last Friday showed that U.S. job growth was lower than expected and the unemployment rate rose to 4.3%, the highest level since October 2021.

Siegel pointed out that this unemployment rate "broke through" the central bank's target unemployment rate of 4.2%. On top of that, the inflation rate has fallen 90%, close to the Fed's 2% target.

It is extremely rare for the Fed to take interest rate cuts outside of its regular meetings, but it is not unprecedented.

No worries about the market falling into a "downward spiral"

Since the non-farm payrolls data was cold, stocks, the dollar and U.S. Treasury yields have all fallen sharply. As panic spread, global markets suffered a "Black Monday" on Monday, with stock markets in many Asian markets hitting circuit breakers and U.S. stocks recording their biggest drop in two years.

This has prompted some to call for an emergency rate cut by the Federal Reserve before its September meeting.

Nigel Green, CEO of DeVere Group, also said in a press release that the Fed "needs to act immediately... otherwise there may be a substantial and far-reaching risk of a hard landing."

However, some people are worried that the Fed's emergency rate cut will instead cause more panic on Wall Street because it shows that the U.S. economy is "in big trouble."

But Siegel is not worried that an emergency rate cut will put the market into a "downward spiral." In fact, he believes that the market will welcome the rate cut and "rise sharply."

He cited the example that Fed Chairman Greenspan did not cut interest rates at the December 2000 meeting, but made an emergency rate cut of 50 basis points in early 2001, and the market rebounded sharply.

Siegel also predicted that if the Fed does not urgently cut interest rates before the September meeting, the market will fall sharply.

"If they cut rates as slowly as they raise them, which, by the way, is the first policy mistake in 50 years, then our economy will not be better," he said.

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Calls for an "emergency rate cut" are growing! Wharton School professor calls on the Federal Reserve to cut 75 basis points first and continue next month

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