Jeremy Siegel Says We Need an Emergency Rate Cut Now

You know economists are worried when they call for the Federal Reserve to institute emergency rate cuts. That’s what Jeremy Siegel, a professor emeritus of finance at Wharton and chief economist at WisdomTree Investments, said Monday on CNBC’s “Squawk Box.”

“This may surprise people,” Siegel said. “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.” He added that the benchmark federal funds rate should be between 3.5% and 4%.

Siegel’s reasoning was to follow previous Fed statements, such as the “long run fed funds rate when inflation reached 2% and unemployment has come up to 4.2% should be 2.8%,” which would be “normal.” He then said that inflation at 2.5% was more than 90% of the way to the first Fed target and the 4.3% unemployment rate was already past the second but with no rate cut.

“That makes absolutely no sense whatsoever,” Siegel emphasized.

Nobel laureate Paul Krugman posted online that he has been arguing for a 50-basis point cut in September, not an inter-meeting cut to avoid generating panic. “But since we may be seeing a panic anyway, that argument loses its force. Real case for an emergency cut soon.”

Elisabeth Buchwald, an economics reporter at CNN, rightly pointed out that emergency actions by the Fed are highly unusual. That’s partly in the definition of an emergency and there are two other additional reasons. One is the nature of monetary policy. It takes time to take effect and then more time to understand the results. The central bank cannot lurch from one side of the economic ship to the other, tipping the vessel right and left, knocking things, and maybe people, over the railings, because the responses become unreasoned and utterly reactive.

The other reason is markets in general, including consumers and their spending, which alone is 69% of GDP. Emergency moves have psychological impacts as well as financial. A sudden cut in rates could make people assume a serious recession was on its way, generating the type of panic Krugman mentioned. They would likely behave accordingly, helping to bring the recession that might not have been.

Or, as Federal Reserve Bank of Chicago President Austan Goolsbee told the New York Times on Monday, “We’ve got to be monitoring the real side of the economy: There’s nothing in the Fed’s mandate that’s about making sure the stock market is comfortable.”