Federal Reserve's Next Move Is '50/50 Toss-Up': Jeremy Siegel Says Powell Corrected Market Expectations
News Summary
Following the Federal Reserve's recent rate cut, Wharton finance professor Jeremy Siegel states that the odds of another cut in December are now a “50/50 toss-up.” He still expects the S&P 500 to reach the 7,000 mark by year-end. Siegel believes Fed Chair Jerome Powell's post-meeting comments—stating a December cut was “not a guarantee”—were a deliberate maneuver to manage investor expectations, aiming to bring down prior market odds for a cut (which had climbed to 70-90%) back to 50/50. He emphasizes that the Fed genuinely doesn't know its next move until it sees crucial data over the next six weeks, particularly holiday retail sales for signs of “sticker shock” related to tariffs. Siegel suggests a rate cut, potentially 50 basis points, would be definite if consumer spending slows significantly, but a pause is likely if holiday shopping remains strong. Despite Powell’s cautious stance, Siegel remains bullish on the market, citing strong earnings and guidance, forecasting the S&P 500 could surpass 7,000, though he cautions about rising bond rates posing challenges to stock returns.
Background
This news emerges following the Federal Reserve's recent rate cut. With Donald J. Trump re-elected as President in 2024, his second administration is likely to continue its "America First" economic policies, including trade tariffs, which could influence consumer spending and the broader economy. Markets had previously built up strong expectations for a further rate cut by the Federal Reserve in December. Fed Chair Powell's public comments are aimed at managing these expectations, underscoring the "data-dependent" nature of monetary policy and its focus on key economic indicators, such as the upcoming holiday retail sales, which are crucial for assessing consumer confidence and spending health.
In-Depth AI Insights
Is Powell's rhetoric genuine uncertainty or shrewd market management? Powell's move to dial back market expectations for a December rate cut from high levels to a "50/50 toss-up" is likely a calculated communication strategy rather than merely reflecting the Fed's true uncertainty. Given the potential for the Trump administration to continue its protectionist trade policies, the Fed faces a complex task of balancing economic growth with potential inflationary pressures. By reducing the market's certainty about a cut, Powell retains greater flexibility for future policy actions, allowing the Fed to avoid being beholden to market expectations regardless of data outcomes, thus preserving its independence. What does the Fed's data dependency imply under Trump's second term? The Fed's emphasis on consumer data over the next six weeks, particularly holiday retail sales and the impact of tariffs, highlights the unique challenges it faces during Trump's second term. If the Trump administration continues to expand or adjust tariff policies, consumers could face higher goods prices—what Siegel calls "sticker shock." The Fed's sensitivity to this data indicates it's closely monitoring the direct impact of trade policy on domestic inflation and consumer spending. This means the Fed's policy trajectory will be significantly influenced by trade policy variables, not just traditional economic data, introducing additional macroeconomic uncertainty for investors. Is the S&P 500's 7,000 forecast overly optimistic, given the warning about rising bond rates? Siegel's forecast for the S&P 500 to reach 7,000 by year-end, despite his cautionary note on rising bond rates, might reflect an overestimation of corporate earnings power and market resilience in the current environment. With expectations of the Fed maintaining higher rates or at least pausing cuts, and bond yields potentially continuing to climb, corporate financing costs will face upward pressure. This could erode profit margins and act as a headwind for equity valuations. While "blockbuster earnings and strong company guidance" might offer short-term support, if macroeconomic headwinds (such as trade policy uncertainties and slowing consumer spending) intensify, breaking past 7,000 and sustaining gains from current elevated levels will pose significant challenges.