Wharton's Jeremy Siegel Calls Stock Sell-Off A 'Healthy' Reality Check: 'Market Was Overly Optimistic'
Jeremy Siegel, professor emeritus at the University of Pennsylvania’s Wharton School, described the stock market’s recent downturn as a “healthy” reaction to the Federal Reserve’s cautious approach to future interest rate cuts.
What Happened: The Federal Reserve’s decision to lower interest rates by a quarter percentage point, setting the target range to 4.25% to 4.5%, was accompanied by a revised forecast indicating fewer rate cuts in 2025 than previously expected. This announcement led to declines across all three major Wall Street indexes, as investors had anticipated more aggressive rate reductions, CNBC reported on Thursday.
"The market was overly optimistic…so I am not surprised at the sell-off," he said.
He suggested that the Fed might reduce rates only once or twice next year, with the possibility of no cuts at all due to inflation concerns.
The Fed’s new projections expect the core personal consumption expenditures price index to remain elevated at 2.5% through 2025, above the 2% target. Siegel also mentioned potential tariffs from President-elect Donald Trump could impact inflation, though he believes the actual tariffs may not be as significant as feared.
Why It Matters: The Federal Reserve’s recent decision to cut interest rates by 0.25% was widely anticipated, marking the third consecutive reduction in borrowing costs. This move brought the federal funds rate to its lowest level since January 2023, following a 50-basis-point cut in September and a 25-basis-point move in November. However, the decision was not unanimous, with Cleveland Fed President Beth M. Hammack voting to maintain the target range unchanged at 4.5%-4.75%.
Experts have noted that while the rate cut was expected, the Fed’s projections for 2025 brought a sobering outlook. The Fed’s cautious stance on future rate cuts, as indicated by the December dot plot, flags only two potential cuts in 2025. This has led to a reassessment of market expectations, with investors adjusting to the reality of a less aggressive monetary policy.
Meanwhile, the CNN Money Fear and Greed Index fell into the “Fear” zone on Wednesday, signaling a decline in market sentiment. U.S. stocks closed lower, with the Dow Jones index dropping over 1,100 points for the 10th consecutive session.
Price Action: As per Benzinga Pro, SPDR S&P 500 ETF Trust (NYSE:SPY) which tracks the S&P 500 closely, has dropped by 3.35% in the past week while Invesco QQQ Trust, Series 1 (NASDAQ:QQQ) dropped by 2.13%.
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Disclaimer: This content was partially produced with the help of Benzinga Neuro and was reviewed and published by Benzinga editors.
Photo courtesy of the Federal Reserve.
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