Wharton School professor Jeremy Siegel shares his market outlook for 2019 and the role of Fed excess reserves in stock prices.
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Jeremy Siegel: Market Slowdown, But No Recession In 2019
You’ve typically been bullish. I can go back a long time and it’s been the right call. By the way. But you know I wonder in this environment or one you could imagine is there anything that would turn your view to one that would be perhaps a bit. Less sanguine.
Yeah well I mean. Clearly not a recession.
Is good and bring the markets down more. I don’t I don’t see it in the cards. But let’s face it it’s a delicate matter for the Federal Reserve. We’re going to get the employment report on Friday. Some say it’s going to go down to three point six percent. That’s a 50 year low. We can have 150 to 200 thousand increase every month unless we get more people feeding into the workforce which doesn’t look likely. So the bottom line is the Fed. Had to squeeze enough to get us down to around 100 120000 now. You know do we have that precision. Has the Fed ever engineered a soft landing. Not exactly. There’s always been a wobble here and I think that’s exactly what the market feels are going to be a wobbling to a slowdown but not a recession. And until we see that clear people say I’m going to be cautious. But if there isn’t a recession I think you’ve got really great values of course. Obviously a trade war but Trump can’t afford that now because he knows the stock market is so that certainly won’t look at that favorably and he does care about the stock market. So some deal is going to be reached on trying to avoid a recession. We’re going to have a really good market.
Jeremy. I mean the Fed rate hikes get all the attention in the headlines. Do you think the fact that they are trimming their balance sheet unwinding years stimulus through QE 1 2 and 3 is having any impact on the markets either psychologically or mechanically. Well.
The thing is there are still excess reserves there that can be absorbed. If what we will see if if if the Fed gets too tight in its quantitative tightening in other words getting rid of reserves we will see the Fed funds rate rise above the level that they pay on reserves which is now two point forty. But that’s exactly where the Fed funds rate is now which means there’s all these excess reserves that the banks are putting on deposit at the Fed. If it ever rises above 240. Wow look out. That means they are getting too tight but I think the Fed is aware of that. They still think there’s somewhere around a trillion dollars of excess reserves that they could absorb. But they know they can’t go beyond that because then they lifted up from the reserve level and that’s tantamount to another tightening of the rate. So they’re watching that but I don’t think right now that that is a problem for the market.