The Federal Reserve's long-awaited pivot toward easing monetary policy is almost here, with a September interest-rate cut now "a near certainty", according to Jeremy Siegel, Wharton professor emeritus and WisdomTree chief economist.
And that's just the beginning, he says.
In recent commentary, Siegel forecast three rate cuts before year-end, starting with a 25-basis point reduction at the September 16-17 meeting. He calls for the U.S. central bank to ultimately lower benchmark borrowing costs below 3%, arguing that the economy no longer requires restrictive real rates to maintain stability.
"The market got exactly what it needed last week: confirmation that the economy is slowing—not collapsing—and that the Federal Reserve has the green light to start cutting rates," Siegel wrote in a note for WisdomTree this week. He pointed to softening payrolls data, weak manufacturing output, and a rise in U-6 underemployment as signs that labor-market slack is increasing.
Even if inflation surprises to the upside in the upcoming CPI or PPI prints, Siegel believes the Fed's focus has shifted decisively toward employment weakness.
Fed Rate Under 3%?
With the fed funds rate currently hovering between 4.25% and 4.5%, Siegel argues that monetary policy remains too tight given subdued money growth and inflation trending in the 2–3% range.
"I advocate the Fed brings the policy rate below 3% over time," he wrote.
"The economy simply doesn't require restrictive real rates with money growth subdued and inflation trending in the low 2-3% band. As cuts progress, the yield curve should normalize from its inverted state, and that shift historically supports equity multiples—particularly for rate-sensitive segments," he added.
Bond markets appear to agree. The CME FedWatch tool now shows that a September rate cut is now fully priced in by interest-rate futures, which also project a 90% probability of another reduction in October. At the same time, yields on 10-year Treasuries are drifting back toward 4%, from a peak of 4.81% reached in January.
For investors, the implications are clear: easing financial conditions are bullish for equities, though the slowing economy may temper excessive optimism.
Siegel expects small caps and cyclical stocks—laggards during the tightening cycle—to benefit most. Tech leadership remains intact, but he anticipates broader market participation as rate cuts progress.
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