Jeremy Siegel, a professor of finance at Wharton and author of The Future for Investors, was recently asked to analyze the Fed’s decision to cut short-term interest rates by a quarter percent or 25 basis points. The Fed cut its main short-term rate target to 4.25% and the “discount rate” charged on direct Fed loans to commercial banks to 4.75%.and its impact on the markets.
Siegel says “ If I were there, I would have tried to have gotten 50, but I’m not at all surprised at 25. What surprised me a bit was the retention of the balanced directive. And what that means is that the Fed still sees inflation as a potential problem and did not wish to elevate the slowing economy to a primary position in its policy making. That was a surprise.”
“Many felt that with GDP growth slowing down this quarter virtually to zero, that the Fed would have put more emphasis on the slowing growth. So, the stock market’s reaction, which is a great disappointment, is not surprising. There is a feeling now that the Fed may be what we term ‘behind the curve,’ which means they are not being preemptive in trying to prevent a recession or a slow down, but they are only being reactive — and being reactive might be too slow.”
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