Wharton School professor Jeremy Siegel said Thursday that Wall Street’s stock selloff was “healthy” as the Federal Reserve’s cautious forecast of future interest rate cuts gave investors a “reality check.”
The US Federal Reserve has cut interest rates by a quarter percentage point raised its overnight interest rate to a target range of 4.25% to 4.5% at its last meeting of the year. Meanwhile, the Federal Open Market Committee indicated it would likely cut interest rates just two more times in 2025, fewer than the four cuts announced in its September forecast.
All three major indices on Wall Street sank in response to the Fed’s revised outlook as investors had bet the central bank would remain more aggressive in cutting borrowing costs.
“The market was almost in an out-of-control situation … and that brought home to them the reality that we’re just not going to get interest rates as low” as investors had bet when the Fed began its easing cycle, Siegel said , Professor Emeritus of Finance at the Wharton School of the University of Pennsylvania, told CNBC’s “Squawk Box Asia.”
“The market has been too optimistic … so the selloff doesn’t surprise me,” Siegel said, adding that he expects the Fed to scale back the number of rate cuts next year, with just one or two cuts.
There’s also “a chance there won’t be a cut next year,” he said, as the FOMC has raised its inflation forecast going forward.
The new Fed’s forecasts show that officials expect the price index for personal consumption expenditures (excluding food and energy costs), or core PCE, to fall will remain increased at 2.5% until 2025still well above the central bank’s 2% target.
Siegel suggested that some FOMC officials may have taken into account the inflationary impact of potential tariffs. President-elect Donald Trump has promised We want to introduce additional tariffs against ChinaCanada and Mexico on the first day of his presidency.
But the actual tariffs may not be “nearly as high as the market fears,” Siegel said, as Trump would likely try to avoid any resistance from the stock market.
Market participants now expect the Fed to do so Interest rates were only reduced at their meeting in JuneAccording to the CME’s FedWatch tool, a 25 basis point rate cut is priced in with a 43.7% probability at this point.
Marc Giannoni, Barclays chief U.S. economist, stuck to the bank’s baseline forecast that the Fed will make just two 25 basis point interest rate cuts next year, in March and June, fully taking into account the impact of tariff increases.
Giannoni said he expects the FOMC to resume gradual rate cuts around mid-2026 after inflationary pressures from tariffs ease.
Data released earlier this week showed U.S. inflation rose faster each year In November, the consumer price index showed a 12-month inflation rate of 2.7%, after rising 0.3% during the month. Without fluctuating food and energy prices, the central consumer price index rose 3.3% year-over-year in November.
“It is a realization and a surprise to everyone, including the Fed, that the economy can remain as strong as it is given high short-term interest rates relative to inflation,” Siegel added.
The Fed has entered a new phase of monetary policy – the pause phase, said Jack McIntyre, portfolio manager at Brandywine Global, adding: “The longer it lasts, the more likely it becomes that markets will have to evaluate a rate hike and a rate cut equally. “.”
“Political uncertainty will lead to more volatile financial markets in 2025,” he added.
