Why does this Wharton professor thinks the Fed should cut rates but probably won’t?

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June 13, 2019 3:46pm NYSE:TLT

Federal Reserve

From Keris Lahiff:

Stocks have rallied within range of records on high hopes for a rate cut, possibly as soon as next week.


Investors could be waiting a little longer, warns Wharton professor of finance Jeremy Siegel.

“They should cut rates, but they won’t — not quite yet,” Siegel told CNBC’s “Trading Nation ” on Wednesday. “I think they’re going to put out a directive that says in their next meeting which will be July 31st after the June meeting that they’re very likely to cut rates and I think the market will be satisfied with that. ”

The Federal Open Market Committee is set to meet Tuesday, culminating with a decision on Wednesday afternoon. Markets are pricing in a 20% chance of a 25-basis-point cut at the June meeting, according to CME fed funds futures, with those odds jumping to 66% at the July meeting.

Siegel says the Fed will first want to lay the groundwork for a rate cut before it takes action, a process requiring a longer time frame beyond next week’s meeting.

“The Fed is very deliberate. Before they move, they like to make announcements and speeches. They haven’t really had a chance to really prepare those. We still could get a cut. There may be some dissents among the Fed officials saying I want to cut now, but I say the odds are a setup for a cut that will come at the end of July,” he said.

Even when the Fed cuts rates next, Spiegel says it might be too little to spur the kind of economic growth anticipated.

“The Fed is a little bit too slow,” he said. “There should be a 50-basis-point cut. Given where the 10-year [Treasury note] is right now, we should be below on the funds rate than the 10-year, and even 25 basis points won’t really put us below. So I really think there should be more.”

The 10-year has come back from the year’s lows last week, though still trades at its lowest level in nearly two years. Yields fall when bond prices rise, an indication that investors are flocking to safe-haven assets such as Treasurys. The effective fed funds rate guides banks on the interest rate at which they lend excess reserves. A lower rate encourages more lending and borrowing.

Beyond the Fed, investors also need a resolution on the trade war before the stock market can make larger strides higher, says Siegel.

“Right now projections are Q2 growth is 1.5%. That would be the slowest during the Trump presidency. … If the tariff clouds continue to gather in second half of the year, we may barely reach 2%,” he said. “Short term, it’s going to be hard to make big gains with the trade clouds and the interest rate clouds hanging over the market.”

The U.S. economy ended 2018 with economic growth at 2.9%. A slowdown to sub-2% would mark its lowest level since 2016.


The iShares 20+ Year Treasury Bond ETF (TLT) was trading at $131.21 per share on Thursday afternoon, up $0.53 (+0.41%). Year-to-date, TLT has gained 4.30%, versus a 8.68% rise in the benchmark S&P 500 index during the same period.

TLT currently has an ETF Daily News SMART Grade of B (Buy), and is ranked #16 of 29 ETFs in the Government Bonds ETFs category.


This article is brought to you courtesy of CNBC.


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