Wharton's Siegel: Weak Data Could Force Fed's Hand on Rate Cuts

Weakening economic data has emerged as a positive signal for financial markets, with a Wharton professor asserting that it is "exactly what markets needed" to justify a potential Federal Reserve rate cut. Professor Jeremy J. Siegel, WisdomTree’s Senior Economist and Emeritus Professor of Finance at the University of Pennsylvania’s Wharton School, emphasized that softer readings in key areas—such as housing starts and labor claims—reflect a broader economic slowdown that could support an easing of monetary policy. This perspective contrasts with more hawkish interpretations of economic resilience, particularly in light of the ongoing productivity gains from artificial intelligence in the corporate sector.

Recent data points highlight a slowdown in the labor market, with initial jobless claims remaining elevated around 240,000 for three consecutive weeks, while continuing claims show an upward trend as unemployed workers remain on the rolls longer. Siegel pointed to these as early warning signs of a cooling labor market, which is critical in assessing the Fed’s next move. Additionally, the Federal Reserve itself is reportedly planning a 10% reduction in its workforce—an internal productivity measure that may further signal the broader economic shift toward efficiency. These developments suggest that the Fed may be under pressure to reduce its policy rate to match what Siegel describes as the true neutral rate of around 3.5%.

The housing market has also shown signs of distress, with weak data on housing starts and a continued decline in shelter inflation, which accounts for 40% of the core Consumer Price Index (CPI). Siegel predicted that this trend will offset any inflationary effects from rising tariffs and could lead to core inflation falling below the Fed’s 3% PCE forecast by year-end. Such an outcome would further justify a rate cut, as it would reduce pressure from the inflation side of the central bank’s dual mandate.

Market expectations for Fed policy have already begun to shift. Term premiums in the bond market remain subdued, and European central banks are moving toward easing cycles, making U.S. monetary policy an outlier in a global context. Siegel criticized the Fed’s current approach, particularly its reluctance to cut rates despite what he views as a tax-like effect of tariffs on input costs. He argued that treating such price increases as a reason to maintain restrictive policy is economically flawed and risks prolonging unnecessary financial stress.

Looking ahead, Siegel recommended a strategic shift in investment allocations. He advocated for maintaining an overweight position in equities over bonds, given the anticipated decline in the Fed Funds Rate, which would re-anchor discount rates and support higher equity valuations. Investors were also advised to avoid chasing high-multiple AI enablers and instead focus on industries that can leverage AI to improve margins and operational efficiency, such as banking, industrials, and consumer staples. A steeper yield curve, he added, could benefit dividend-rich value stocks and defensive sectors once the Fed begins to pivot.

Source: [1] Weekly Siegel Commentary (https://resources.wisdomtree.com/weekly-siegel-commentary/) [2] WisdomTree ETFs (Exchange Traded Funds) & Investments (https://www.wisdomtree.com/investments) [3] Traders see a chance the Fed cuts by a half point (https://www.cnbc.com/2025/09/08/traders-see-a-chance-the-fed-cuts-by-a-half-point.html) [4] Fed is almost certain to cut rates by 25 basis points after ... (https://www.marketwatch.com/story/fed-is-almost-certain-to-cut-rates-by-25-basis-points-after-months-of-debate-why-are-so-many-people-unhappy-with-that-63e2266c)