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This economist says he can’t rule out a Fed interest-rate cut by year-end. Here’s why.

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Wharton professor Jeremy Siegel said on Friday that he is not ruling out an interest- rate cut by the Federal Reserve by the end of the year, despite market expectations. 

Traders in federal funds futures are pricing in a scant 1% chance that the central bank will lower its key interest rate from the current range of 5% to 5.25%, according to CME FedWatch.   

The U.S. central bankers penciled in two more rate hikes this year in their “dot plot” forecast at the most recent monetary-policy meeting in June.

“Coming into a political year, and it seems that we are already in a political year, if we get some soft data, if we get some worrisome employment data, if we get a negative jobs report, you are going to have political pressure,” Siegel said in an interview with CNBC on Friday. 

Siegel said he thinks the true rate of inflation has already fallen to the Fed-targeted 2% on a year-over-year basis, if calculated with real rental and shelter prices. While the core of the PCE index, the Fed’s preferred inflation gauge, still stood at around 4.6% in May, the Fed “also knows that lower data is going to come in the second half of the year,” according to Siegel. 

See: Fed-preferred PCE gauge shows lowest U.S. inflation rate since April 2021

Also: U.S. consumer sentiment climbs to 4-month high on slower inflation and end of debt-ceiling fight

While Siegel said the balance of risks tilts more to the downside than the upside in the second half of the year, the stock market’s upward momentum could continue. “I don’t see the short-run trend breaking at any point soon,” Siegel said. 

U.S. stocks rallied Friday to close out the first half of this year, with the Dow Jones Industrial Average
DJIA,
+0.84%

up 3.8% to date in 2023. The S&P 500
SPX,
+1.23%

has jumped 15.9% and the Nasdaq Composite
COMP,
+1.45%

has surged 31.7%, according to FactSet data.



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