Top economists warn: If Powell does not cut interest rates significantly, the US economy may "rush towards the cliff"!

Jeremy Siegel, a professor at the Wharton School known as the "Godfather of the Stock Market," recently wrote that the Federal Reserve should consider a larger rate cut, or else face the risk of an economic recession. Here are his views.

All debates about the upcoming Federal Reserve meeting are focused on whether Powell will cut rates by 25 or 50 basis points. However, most economic models suggest that he should choose the federal funds rate level that best fits the economic conditions, rather than focusing on the speed of cutting rates from a very restrictive level.

Choosing between 25 and 50 basis points is like a driver speeding at 60 miles per hour on a winding mountain road with a speed limit of 25 miles per hour. Common sense tells us that he should slow down immediately, rather than gradually slowing down to 55 miles per hour as the road conditions worsen.

When setting the federal funds rate, the Federal Reserve follows its dual mandate of maintaining stable inflation and full employment. According to the Fed, the labor market is now balanced, with the unemployment rate reaching the long-term target of 4.2%, and other labor market indicators returning to normal ranges. Although inflation is slightly above the Fed's target on a year-on-year basis, it is very close to the target - with oil and commodity prices falling rapidly, the 2% inflation target can be achieved soon. In these two aspects, the Fed has basically achieved its goals.

At the June meeting, the Fed stated that the federal funds rate should be 2.8% when it achieves its dual mandate, which is the level known as the neutral rate by the Fed and economists. However, there is significant uncertainty around this rate: estimates of the neutral rate by the 19 Federal Open Market Committee (FOMC) members range from a low of 2.4% to a high of 3.8%.

I believe the neutral rate is closer to the high estimate (3.8%), but the current rate of 5.3% is still about 1.5 percentage points higher than this highest estimate. Almost all Fed policy rules, including the Taylor Rule, indicate that the current rate should be 4% or lower. If the Fed believes the median estimate made by its economists and FOMC members in the June economic forecast survey, then the Fed policy rate should already be in the range of 3% to 4%.

Furthermore, Powell often repeats a well-known fact that monetary policy has "long and variable lags," a statement popularized by the late Nobel laureate and monetary economist Friedman. If this is true, then maintaining the current or near-current policy rate level will greatly increase the likelihood of an economic slowdown or recession.

Some argue that since the economy is running smoothly at a 2% growth rate and there are almost no signs of a recession, the Fed should maintain the current rate level. However, the bond market expects a significant rate cut in the next 12 months - the yield on the 10-year Treasury bond is 150 basis points lower than the current policy rate If interest rates follow the gradual downward path set by the Federal Reserve in the June "dot plot," then bond traders' judgment is wrong, and the yield on the 10-year US Treasury bond will rise significantly. This will greatly weaken the US stock, bond, and real estate markets, and sharply increase the possibility of an economic recession.

Powell, like a driver speeding on a mountain road, may indeed safely reach his destination and declare his policy a "success." But if the road's turns become increasingly sharp, then he—and the US economy—may find themselves heading towards a cliff.