The market could be on the verge of a rate hike by the Federal Reserve, according to Jeremy Siegel, chief economist at WisdomTree.
In an interview with CNBC on Thursday, Siegel suggested that the market is signaling the necessity for a rate increase. He believes that the new Federal Reserve chair, Kevin Warsh, might be tested by the market and could potentially “bite the bullet” by raising rates, despite the possibility of political backlash.
Siegel also anticipates that if rates are not raised, it could lead to an unprecedented dissent within the Federal Reserve. He suggested that the forthcoming Consumer Price Index (CPI) data might offer some reassurance to the decision-makers.
Regarding the potential stock market reaction, Siegel predicts an initial sell-off, which could be followed by a recovery if the long bond market reacts positively. He believes that a rate hike could restore market confidence in the Federal Reserve’s commitment to combating inflation.
“I think the market will first shudder, and you’ll see a sell-off. And if, as I expect, that long bond reacts positively, saying, okay, the Fed is credible at fighting inflation, we’re going to get a recovery in the stock market,” Siegel said.
Trump Pressures Fed To Cut Rates
President Donald Trump has repeatedly called for the Federal Reserve to cut interest rates. Earlier this month, he argued that high rates put the U.S. at an “unfair disadvantage”, adding, “I won’t allow that to happen!”
His comments came as stronger-than-expected August job growth and persistent inflation fueled expectations of a possible rate hike. Trump also threatened to stop trading with countries with which the U.S. has a deficit, if rates are not reduced.
Fed Rate Hike Debate Intensifies
Earlier this month, Stephanie Link of Hightower Advisors expressed her belief that the Federal Reserve would not raise interest rates in September, arguing that a 25-basis-point increase would have limited impact. She suggested a hike could come in December instead and said markets may simply feel relieved once the decision is behind them.
She added that Warsh may be waiting to assess whether the AI investment boom boosts productivity and could be relying on newly formed Fed committees and improved inflation data to guide future policy.
On the other hand, Claudia Sahm, a former Federal Reserve economist, stated that a rate hike would be an “appropriate policy” for the Fed’s upcoming meeting. Sahm expressed her lack of confidence in inflation returning to the Fed’s 2% target without a rate hike.
“I view a modest increase in the funds rate, starting with a quarter point in September and maybe 50 or 75 basis points higher in total by the end of the year,” the economist said.
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