Fed should cut emergency rate to avoid US crisis, says top economist

Amid a sinking market and weak economic data, a leading economist is urging the US central bank to start cutting interest rates faster than markets expected.

Jeremy Siegel, a finance professor at the Wharton School of Business, said on Monday that the Fed's funds rate should already be between 3.5% and 4%, -1.5% of the current 5.25% to 5.5% target range.

“I'm calling for an emergency cut of 75 basis points in the Fed funds rate, another 75 basis point cut will be announced next month at the September meeting, and that's low,” Siegel said in an interview with CNBC.

A basis point is one percent of one percent, which means that a decrease of 75 basis points is a decrease of 0.75%.

The economist's recommendation followed last week's disappointing jobs numbers that fueled fears of a US recession, alongside macroeconomic uncertainty raised by the Bank of Japan, raising interest rates above 0 percent. Both forces have combined to wreak havoc on stocks and crypto, with Bitcoin falling below $50,000 on Monday for the first time since February.

For many, the weekend's crash is reminiscent of March 2020, when a wholesale market sell-off occurred amid anxiety surrounding the coronavirus pandemic. After this, central banks around the world stepped in to provide liquidity and lower interest rates, helping stocks and crypto quickly recover to all-time highs.

According to Siegel, senior economist at WisdomTree Investments, it's time for another round of rate cuts by the Federal Reserve.

“The Fed's long-term funds rate – when inflation reaches 2% and unemployment reaches 4.2% – should be 2.8%,” Siegel explained. Last week, July unemployment at 4.3%, CPI inflation reached 2.97% in June, which is a 90% growth since the start of the Fed.

“How much have we moved the federal funds rate? Zero,” Siegel said. “This doesn't make any sense.”

He also said that inactivity can be dangerous.

“By the way, if we continue down the path of the worst policy mistake in 50 years, we're not going to be in a good time with this economy. ,” he said.

Although many expect the Fed to start cutting rates soon, Coinshares head of research James Butterfill thinks the 1.5% cut in September is over the top. He believes that a 50 basis point cut in September is still the most likely approach.

“The Federation [is] Although one of their implicit obligations is a stable market, they can be cautious about overreacting,” Butterfill told Decrypt. “If the markets break down significantly, it could lead to a price drop in August, but it's unlikely yet.”

According to CME Fedwatch, the market is now seeing an 83% chance of a 50 basis point decline in September.

Coinshares is one of several analysts who believe that low interest rates will be high for fixed-supply assets like Bitcoin. While generally good for stocks, AJ Bell investment director Russ Mold says the effects of the looming recession could still be bad news for stocks.

“Those with long memories will remember how the slowdown in 2000-02 and 2007-08 failed to disrupt the bear market in stocks,” he wrote in an analyst note on Monday. Because the economy is in recession and corporate earnings have fallen much faster than the headline spending.

Edited by Ryan Ozawa.