Wharton Professor Jeremy Siegel Says Banking Crisis A Silver Lining: Why He Expects Jerome Powell To Save Markets On Wednesday

Zinger Key Points
  • Siegel highlighted an analysis that show tighter financial conditions due to banking crisis will have an impact of 1.5% fed rate hike.
  • The professor sees psychological messaging impact that could potentially keep the Fed on course.

Ahead of Wednesday’s Fed decision, noted economist Jeremey Siegel provided insights into what could be expected from the central bank’s second policy-setting meeting of the year.

Fed Leaning Toward Another Hike: Barring increased turmoil, the Fed will hike the rate by 25 basis points and hint at the press conference that a pause could come at the next meeting. “The Fed will never commit entirely to a pause and claim to be data dependent, but I believe they will steer our expectations to the pause,” he said.

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The “Dot-Plot curve” that comes with the Fed’s summary of economic projections could be read with hawkish headlines, Siegel said, adding that this could trigger a very short-term sell-off after 2 p.m. EDT on Wednesday. This is because the “Dot-Plot” curve is typically done ahead of the meeting and the participants may not have enough time to revise expectations based on the latest banking failures, he said.

"Powell will then likely talk down expectations for future rate hikes at the press conference and give relief back to the
markets," he added.

Will Powell Pause? Siegel referred to a comment by Apollo Chief Economist Torsten Slok, who said tighter financial conditions over the past week could translate to a 1.5% increase in the fed funds rate or six more 25 basis point hikes.

The Wharton professor, however, doesn’t think a pause is a possibility. There is some psychological messaging impact in play here, Siegel said. If the Fed forgoes a rate hike, it could signal that the Fed is very worried about the banking dynamic and that it is giving up on its inflation fight, he added.

“In summary, the Fed’s hawkish will be toned down and they will discuss monitoring the fallout of the banking panic closely,” the professor said.

On Banking Crisis: Siegel called for temporary insurance for all deposits everywhere until the deposit system can be reformed. “We need much higher deposit protection so these bank runs do not occur,” he said. If insurance coverage were to be increased, banks could be charged an extra 10 basis points or so as fees, he added.

Siegel gave a positive twist to the banking turmoil, stating that it has made him be more optimistic about the outlook for 2024.

“If this banking accident occurred later, we would have much higher rates. So, a natural downshift in how tight policy will become from this is one of silver linings from this current banking crisis,” he said.

Read Next: Elon Musk Responds To Bill Ackman's Plea To Powell For A Pause Amid Banking Crisis: 'Fed Needs To Drop Rates By At Least…'

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