Source: Jinshi Data

Wharton School professor Jeremy Siegel believes that if the Federal Reserve does not start cutting interest rates soon, the U.S. stock market and economy will be at risk.

The top economist, who has advocated for easier monetary policy at the Federal Reserve for months, pointed to more evidence of economic weakness in an interview with CNBC last week.

U.S. gross domestic product has slowed from its rapid expansion through 2023, with the Atlanta Fed forecasting 1.5% growth in the second quarter. The job market, while resilient, has also begun to falter, with the unemployment rate rising to 4.1% last month.

Siegel noted that more jobless claims bring the economy closer to triggering a highly accurate recession indicator known as Sam's Rule, which signals the start of a recession once the three-month moving average of the unemployment rate is 0.5 percentage points above the cycle low. According to the latest data, the indicator rose slightly to 0.43 last month.

Siegel also pointed to an inverted U.S. Treasury yield curve and a slowing money supply as two other warnings that a recession is coming.

“We are in the midst of a slowdown,” Siegel said. “I think Fed Chairman Powell really should have announced a September rate cut at the July meeting and perhaps another rate cut in November .”

He expects inflation to remain under control but said he does not want to see the economic slowdown turn into something worse.

While the risk of a U.S. recession grows the longer rates stay high, forecasters remain divided over whether the U.S. will fall into one next year. The latest estimate from the New York Fed puts the chance of a recession at 56% by June.

Siegel warned that if the Fed does not cut interest rates in September, it could lead to a recession in addition to endangering stock market trends.

Investors have been aggressively pricing in rate cuts all year, and according to CME's FedWatch tool, the market currently prices in at least 1-2 rate cuts by the end of the year.

Federal Reserve officials meet in late July and investors are watching key economic data to be released in the coming week that could influence the trajectory of rate cuts later this year.

All eyes will be on Thursday's consumer price index, which will give policymakers a better idea of whether high interest rates are still needed to keep inflation in check.

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