How much should the US Fed cut rates by 25bps, 50bps or 75bps? Here's what Wharton expert is saying

As it is almost certain that the Federal Reserve will hold an emergency and unscheduled meeting to discuss the bank interest rate cut before September, the question looming large over the US economy is: how much will it reduce the bank rates? The interest rate cut should be enough to stop the economy from slipping into a recession. Jeremy Siegel, professor emeritus of finance at the University of Pennsylvania’s Wharton School and senior economist at WisdomTree has said that the Fed should slash at least 75 basis points immediately. Talking to CNBC, he said that the Fed funds rate right now should be somewhere between 3.5% and 4%. The current level of the Fed rates ranges from 5.25%-5.5%, which is the highest rate in 23 years.

What were the Federal Reserve's projections?

Elaborating on this, he said that at present, the unemployment rate is at 4.3% and the inflation is at 2.5%. He clarified that these were the two targets, set by the Federal Reserve, but it has not moved the bank rates. He referred to the Fed’s survey of economic projections. According to these projections, the bank rates should settle at 2.8% over the long term. Those projections also indicate that the unemployment rate will be 4.2% and the inflation at 2% over the long term. Jeremy Siegel points out that while the unemployment and inflation rates are according to the projections, it is not so in the case of the bank interest rates.

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How much will the Fed cut rates?

Michael Feroli, chief U.S. economist at JPMorgan, also said that “there’s a strong case” to cut before the Fed’s September meeting. Similarly, Bill Miles, an economics professor at Wichita State University, told 'Fortune' that unemployment has gone up, the labor market is still in a decent position, and inflation is still not quite down to where the Fed would like. He said further that signaling a 50-basis-point cut at the Fed's meeting would be the best policy response.

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According to the 'Fortune', Matt Willer, Managing Director for capital markets at investment firm Phoenix Capital Group Holdings, said emergency rate cuts are a “sign of panic” to markets. He added that after waiting so much, an emergency cut would not be a proactive solution anyway.

FAQs

When the next meeting of the Federal Reserve will take place?
The next meeting of the Federal Reserve is scheduled for September, but it will convene an emergency meeting before that so that a rate cut is announced to save the US economy from slipping into a recession.

What were the projections of the Fed Reserve?
According to the Fed Reserve's projections, the bank rates should settle at 2.8%, the unemployment rate at 4.2%, and the inflation at 2% over the long term.