The job market is close to triggering a highly accurate recession indicator, according to Wharton professor Jeremy Siegel.
Steve Marcus/Reuters
The rally in stocks and the strength of the economy is at risk if the Fed doesn't start cutting interest rates soon, according to Wharton professor Jeremy Siegel.
The top economist, who's been making the case for the Fed to loosen monetary policy for months, pointed to more evidence of a weakening economy in an interview with CNBC on Thursday.
GDP has slowed from its rapid pace of expansion in 2023, with the Atlanta Fed estimating 1.5% growth in the second quarter. The job market, while resilient, is also beginning to stumble, with unemployment ticking up to 4.1% last month.
More job losses have pushed the economy closer to triggering a highly accurate recession indicator known as the Sahm Rule, Siegel noted. The indicator signals the start of a downturn once the three-month moving average of the unemployment rate rises 0.5 percentage points above its cycle low. The indicator ticked higher to 0.43 last month, according to Fed data.
That, combined with other recession warnings, is creating a more convincing case that the Fed should dial back interest rates, Siegel said, pointing to the inverted Treasury yield curve and the slowing money supply, two additional warnings that a downturn is on the horizon.
"We are in a slowing economy," Siegel said. "I think it's really time for Chairman Powell to really tee up in the July meeting a cut in September, and maybe another one in November. I think inflation is definitely under control, and I don't want to see this slowing economy turn into something worse."
Forecasters are still divided over whether the US could enter a recession over the next year, though higher-for-longer rates raise the risk of that happening. The New York Fed is currently pricing in a 56% chance the economy could tip into a downturn by next June, per the central bank's latest estimates.
No rate cut in September could put a recession on the table, Siegel warned, in addition to endangering the trajectory for stocks. Investors have been ambitiously pricing in rate cuts all year long, with markets now expecting at least 1-2 cuts by the end of the year, according to the CME FedWatch tool.
"So although I think stocks are still in an uptrend and the growth stocks are still certainly walloping the value stocks, I think Powell has to take note," Siegel said.
Fed officials will meet at the end of July, but investors are looking at key releases of economic data in the week ahead, which could shape the trajectory of rate cuts later this year.
All eyes will be on the consumer price index to roll out on Thursday, which will give central bankers a better idea of whether high rates are still needed to control inflation.
