Jeremy Siegel sees "robust" justification for the Federal Reserve to start cutting its benchmark interest rate and noted that the financial markets remain resilient despite the "lingering cloud of uncertainty" surrounding U.S. trade policy.
Current data justify two to three 25-basis-point cuts by year-end, the Wharton School and WisdomTree economist wrote in his weekly commentary Monday.
Among other points, Siegel noted that the inverted yield curve persists, with the federal funds rate higher than the 10-year Treasury. Historically, a healthy yield curve slopes upward by about 100 basis points, so to normalize it, the Fed would need to bring rates down to roughly 3.3%, he said.
"Importantly, while tariffs and dollar weakness are stirring short-term concerns, long-term inflation expectations remain firmly anchored, setting a strong case for the Federal Reserve to begin cutting rates," Siegel wrote.
The five-year forward inflation rate sits near multi-year lows around 2% for the Personal Consumption Expenditures Price Index, "exactly at the Fed’s target," Siegel said. "Despite political rhetoric around tariffs and inflation, the data tells a clear story: long-term inflation expectations are stable, providing the Fed room to ease without risking a resurgence in inflation."
"Combined with tepid money supply growth ... there is robust analytical justification for cutting rates," the economist added.
Recent corporate earnings reports, while mixed, suggest resilience, Siegel wrote.
"The major drag on sentiment remains the uncertainty tariffs inject into forecasting and operations, but the hard data thus far shows no significant weakening yet," he explained. "Jobless claims remain low, and consumer spending has yet to reflect any real stress."
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