Jeremy Siegel, a professor at the Wharton School of Business, warns that if the Federal Reserve fails to lower interest rates before September, the stock market will be in a predicament and an economic recession will follow.
Jeremy Siegel, a professor at the Wharton School, believes that if the Fed does not start cutting interest rates soon, the US stock market and economy will face risk.
The top economist who has been advocating for the Fed to ease monetary policy for months pointed out more evidence of economic weakness in an interview with CNBC last week.
US Gross Domestic Product (GDP) has slowed from its rapid expansion in 2023, with the Atlanta Fed forecasting second-quarter GDP growth of 1.5%. While the job market has resilience, it is also starting to falter, with the unemployment rate rising to 4.1% last month.
Siegel pointed out that more unemployed people make the economy closer to triggering a highly accurate recession indicator, the so-called "Sam Rule". Once the three-month moving average of the unemployment rate is 0.5 percentage points higher than the cycle low, the indicator predicts the beginning of an economic recession. According to the latest data, the indicator rose slightly to 0.43 last month.
Siegel also pointed out that the inverted US Treasury yield curve and the slowdown in the money supply are two other warnings that an economic recession is imminent.
"We are in an economic slowdown period," Siegel said. "I think Fed Chairman Powell should really announce a rate cut in September at the July meeting, maybe cut rates again in November."
He expects inflation to remain under control but says he doesn't want to see the economic slowdown turn into something worse.
Although the longer interest rates stay high, the greater the risk of a US economic downturn, there is still disagreement among forecasters on whether the US will fall into a recession next year. According to the latest estimate by the New York Fed, there is a 56% probability of an economic recession by June next year.
Siegel warned that if the Fed does not cut rates in September, it could lead to an economic recession, in addition to threatening the stock market.
Investors have been pricing in a rate cut all year, with CME's FedWatch tool currently forecasting at least one to two rate cuts before the end of the year.
Fed officials will hold a meeting at the end of July, with investors watching key economic data to be released in the coming week that could affect the trajectory of rate cuts later this year.
All eyes will be on Thursday's consumer price index, which will give policymakers a better understanding of whether high-interest rates are still needed to control inflation.