Wharton Professor: Politics Are Blocking Fed Rate Hikes

Wharton finance professor Jeremy Siegel believes the Federal Reserve would already be raising interest rates if not for intense political pressure. Speaking after a stronger than expected August jobs report, Siegel pointed the finger at the upcoming midterm elections and President Donald Trump. The US economy added 162,000 jobs in August, easily beating recent monthly averages while unemployment held steady at 4.1 percent.

Trump recently posted a demand on social media, threatening to halt trade with surplus countries unless the central bank cuts rates. Siegel noted that the approaching midterms give the White House an even stronger incentive to keep borrowing costs low. At the same time, Federal Reserve Chair Kevin Warsh faces pressure from fast growing money supply metrics, meaning the central bank still has inflation worries on its radar.

Traders are now rethinking their bets for the upcoming Federal Open Market Committee meeting, shifting away from cuts. Siegel suggests that markets might actually welcome a rate hike if it proves the central bank is serious about fighting inflation. Investors should watch the upcoming consumer and producer price index reports to see how the next policy debate shapes up.