Economist Calls for Emergency Interest Rate Cut to Avoid Turbulence in the US
Amid a flurry of falling markets and poor economic data, a prominent economist is urging the US central bank to start cutting interest rates at a much faster pace than expected by the markets.
Jeremy Siegel, emeritus professor of finance at the Wharton School of Business, said on Monday (5) that the Fed funds rate should already be between 3.5% and 4% — 1.5% below its current target range of 5.25% to 5.5%.
“I’m calling for a 75 basis point emergency cut in the Fed funds rate, with another 75 basis point cut indicated for next month at the September meeting – and that’s minimum,” Siegel said in an interview with CNBC.
A basis point is one hundredth of a percent, meaning a 75 basis point cut would be a reduction of 0.75%.
The economist’s recommendation comes after disappointing job numbers fueled fears of a recession in the US last week, along with macroeconomic instability spurred by the Bank of Japan raising interest rates above 0%. Both forces combined have wreaked havoc on stocks and cryptocurrencies, with Bitcoin plummeting below $50,000 on Monday (5) for the first time since February.
For many, the weekend drop was reminiscent of March 2020, when a market sell-off occurred amid concerns about the coronavirus pandemic. In the aftermath, central banks around the world intervened to provide liquidity and lower interest rates, helping stocks and cryptocurrencies quickly recover and reach new all-time highs.
According to Siegel, who is also a senior economist at WisdomTree Investments, it’s high time for another cycle of rate cuts from the Federal Reserve.
“The Fed has said that the long-term federal funds rate — when inflation hits 2% and unemployment reaches 4.2% — should be 2.8%,” Siegel explained. Last week, July’s unemployment stood at 4.3%, while CPI inflation hit 2.97% in June, representing 90% progress from the Fed’s starting point.
“How much have we changed the Fed funds rate? Zero,” Siegel said. “This makes absolutely no sense.”
Inaction, he adds, could be disastrous.
“If they are as slow on the way down as they were on the way up — which, by the way, was the worst economic policy mistake of the last 50 years — then we will not have a good time with this economy,” he said.
While most expect the Fed to start cutting rates soon, Coinshares’ head of research, James Butterfill, believes a 1.5% cut by September is a bit excessive. He thinks a 50 basis point cut in September is still the most likely path.
“The Fed is likely to be cautious and not overly reactive, despite one of its implicit mandates being a stable market,” Butterfill told Decrypt. “If markets deteriorate significantly further, this could lead to a rate cut in August, but so far it is unlikely.”
According to CME Fedwatch, the market is now pricing in an 83% chance of a 50 basis point cut in September.
Coinshares is among several analysts who believe that lower interest rates will be bullish for fixed supply assets like Bitcoin. While generally good for stocks, Russ Mould, Investment Director at AJ Bell, says the looming recession could still spell bad news for stocks.
“Those with a good memory will recall how frantic rate cuts in 2000-02 and 2007-08 failed to prevent a bear market in stocks,” he wrote in an analyst note on Monday. “Because the economy took a turn and corporate profits fell much faster than the cost of money.”
*Translated by Gustavo Martins with permission from Decrypt.
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