Higher Interest Rates Are Living on Borrowed Time, Jeremy Siegel Says

The big debate on Wall Street is how high the Federal Reserve will take interest rates, aiming to stamp out high inflation, and if they will stunt the economy. There’s a case, though, that interest rates will head in the other direction.

The momentum right now is for ever-higher rates. James Bullard, president of the St. Louis Fed, contends that the Fed funds rate needs to climb to somewhere between 5% and 7%. Futures markets are convinced that the central bank will increase by half a percentage point at its mid-December meeting, which would put it in a 4.25% to 4.5% band.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

The other side of this debate, which typically gets less attention, is that rates will be cut in 2023 as the economy heads south. Jeremy Siegel, emeritus professor of finance at the University of Pennsylvania’s Wharton School, is a prominent proponent of the dovish viewpoint. Siegel “would not be surprised to see the Fed reversing course next year from uber hikes back to rate cuts,” he wrote recently in his commentary for WisdomTree Investments, where he is a senior investment strategy adviser.

The reason, of course, is that he expects an economic slowdown severe enough to bring radical rate cuts. He expects there will be “a 2% Fed funds rate by the end of 2023,” he wrote.

Evidence of a weakening economy buoys his prediction, he argued, although the Fed at the moment seems more focused on constraining high inflation. The Producer Price Index has been slowing all year, turning negative in July, hitting zero in August and advancing by minuscule amounts (0.2% in September and October) since.

The deceleration of the PPI, which measures wholesale prices, was a non-event at the Fed, Siegel complained. Fed officials, in public appearances, ended up “ignoring these improving price trends,” which he believes portend a lessening of inflation.

In addition, the National Association of Home Builders Housing Market Index, done in conjunction with Wells Fargo, continues to show that this important economic sector is shrinking, he pointed out. The NAHB index, a gauge of builders’ confidence, has fallen almost 60% this year. “This did not translate to a major drop in housing starts or home sales yet, but we will surely see more pressure on housing prices given the surge in mortgage rates,” Siegel remarked.

While the labor market remains strong, Siegel went on, he expects that to be temporary.

Once the jobs situation sours, he said, the Fed will wake up. But that may well be too late, he added.

In that scenario, a deeper recession than necessary will ensue because the Fed did not lower rates soon enough, in his view.

“There is still a small chance we can avoid a recession if the Fed recognizes the inflationary impulse and pressures are over and eases off the brakes,” Siegel declared.

Related Stories:

Will the Federal Reserve Go Too Far?

Jeremy Siegel: What to Buy to Be Insulated From Inflation

Interest Rates Are Up, So Why Are Bank Stocks Down?

Tags: Federal Reserve, Interest Rates, James Bullard, Jeremy Siegel, labor market, NAHB, PPI

The 2020 fund reporting error’s revision triggered the state’s shared-risk provision, which required school districts, as plan providers, and plan participants to pay more into the system.

The Pennsylvania Public School Employees’ Retirement System, the commonwealth’s largest pension fund, is exploring legal action stemming from a 2020 reporting error. At its most recent board meeting on November 15, the fund authorized law firm Blank Rome LLP to commence litigation in respect to the error.

The board also authorized staff to undertake an “emergency procurement” to find a new investment consultant, while encouraging potential new consultants to respond to its request for proposals.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

The long-developing situation led both the pension fund’s executive director, Glen Grell, and CIO, Jim Grossman, to retire in November 2021 after a portion of the board attempted to force their termination earlier in the year.

The turmoil started In December 2020, when Aon, as the PSERS’ general investment consultant, told the board its nine-year performance figure was 6.38%, just above a 6.36% threshold that would trigger additional contributions.

After repeated inquiries to Aon about data inconsistencies were finally answered in February 2021, the fund’s staff informed the board there were errors in the data used to perform the calculation. A review of the data found that the actual nine-year performance fell short of the 6.36% target. This revision triggered the state’s shared-risk provision, which required and plan participants to pay more into the system.

The FBI , the U.S. Department of Justice and the Securities and Exchange Commission all investigated to determine whether kickbacks or bribes were involved in the misstatement of the pension performance. The Justice Department earlier this year closed its investigation.

In February, PSERS publicly released the report it commissioned from law firm Womble Bond Dickinson, which attributed the return errors to corrupted data entered on an internal Aon system.

Grell, the executive director at the time, wrote in response to the law firm’s report that, “In its March 5, 2021, letter, Aon admitted that its data had been corrupted by ‘an [Aon] analyst in uploading NAV and cashflow data from the BNY system into the PARis performance system [that] Aon uses.’ In other words, Aon failed to confirm that its own data—stored in a system that only Aon has access to—was correct before using that data to calculate the System’s nine-year performance in 2020.”

“It is important to note that PSERS Staff report that they relied upon Aon as the fund’s general investment consultant and had no reason to doubt Aon’s research and conclusion regarding these explanations,” the report stated.

The report found that an Aon executive called the fund’s CIO in February 2021 to divulge the error impacting the reported total fund performance. Aon followed this up by providing PSERS with data showing that the original data for Q2 and Q3 2015 had inaccurate cashflow measurements.

Aon this year sent PSERS two memos for distribution, both of which indicate its own culpability for the error. The memos attribute the incorrect data as “clerical mistakes at a data-entry level” by its staff.

The Womble Bond Dickinson report found no illegal activity, and nobody involved has been charged with any wrongdoing.