'Powell has to be on high alert': Wharton professor Jeremy Siegel says the Fed needs to consider rate cuts a lot sooner than the market thinks

• Wharton professor Jeremy Siegel said the Federal Reserve needs to consider interest rate cuts a lot sooner than expected.
• Inflation has been mostly tamed and the threat of an imminent recession is real, he told CNBC.

Wharton professor Jeremy Siegel said Monday that the Federal Reserve needs to stay flexible and consider interest rate cuts a lot sooner than the market expects.

That's because there is a threat of an imminent recession following weak economic data, and inflation has for the most part been tamed.

"I think Jay Powell has to be on high alert because we did get some weak data, certainly on the ISM, jobless claims, and certainly on Friday [jobs report]. The Fed cannot screw up the way it did on inflation by waiting a year too late. Now, I'm not saying we're going to have a recession... but he's got to be very alert to [a] slow down," he told CNBC.

The October ISM manufacturing index came in a 46.7 last week, well below economists' estimates of 49.0. The latest reading also marked the 12th straight month below the 50 level, which signals a contraction in activity. Meanwhile, the October jobs report showed 150,000 jobs were added to the economy, below estimates of 180,000. The unemployment rate also ticked higher to 3.9%.

Siegel argued that even if inflation remains sticky, Powell has to consider lowering interest rates next year because today's economic environment is nothing like the 1970's, which was the Fed's worse nightmare.

During the 1970's, inflation spiraled out of control and led to a prolonged economic downturn that required massive monetary tightening to stomp out rising prices.

"It's not the 1970's," Siegel said. "And I just don't want him to delay the way he did on inflation. He's got to be flexible... he really has to be truly two-sided because we do have two-sided risks right now and the downside is looming much bigger than it certainly did a week ago."

One reliable recessionary indicator on Siegel's radar just flashed, which happens when the unemployment rate jumps 50 basis points from its cycle low. That happened on Friday when the unemployment rate rose to 3.9%, up from its 3.4% cycle low reached in April.

"That has signaled many recessions in the future. I'm not there yet, but I just don't want a stubbornness on the part of the Fed the way they were on the inflation side," he said.

Finally, Siegel highlighted that the Fed could soon come under intense political pressure from Democrats if a recession is imminent right before the 2024 election.

He ultimately expects the Fed's next interest rate move to be a cut rather than a hike, and it should come sometime in 2024.

"I think the Fed should be done. I think the next move is a cut and it might come even sooner than we think given the data," Siegel said.

According to fed funds futures data, the market currently expects the first rate cut to happen in May 2024, with as many as four 25-basis-point cuts occurring by the end of next year.