Here's exactly what the stock market wants from the Fed - and why it might not get it anytime soon, according to Wharton professor Jeremy Siegel

Jeremy Siegel.

REUTERS/Steve Marcus

• Wharton professor Jeremy Siegel said the stock market wants interest rate cuts from the Federal Reserve.
• But that won't happen unless the economy enters a recession and the monthly jobs report turns negative.
• "All you need is a couple of negative payrolls and a rise in the unemployment rate," Siegel said.

Wharton professor Jeremy Siegel highlighted exactly what the stock market wants from the Federal Reserve: interest rate cuts.

But that may not happen anytime soon considering that Fed Chairman Jerome Powell just hiked interest rates for the 10th consecutive time last week to above 5%. That, combined with steady job growth and inflation remaining above the Fed's 2% target mean investors shouldn't hold their breath for future interest rate cuts.

"The internal strength is there. First quarter [earnings] was good, the guidance was not terrible going forward," Siegel said in a Monday interview with CNBC.

While the Fed may not cut interest rates anytime soon, it's also very unlikely that it hikes interest rates again, which could open the central bank to a period of pausing rate moves. And perhaps the stock market may react favorably to that scenario.

"The bar is extremely high" for the Fed to raise interest rates again, Siegel said.

For another interest rate hike to happen, the consumer price index needs to be "much hotter than expected, and I don't mean just one tenth. I mean two, three tenths hotter. We need a very hot employment report for the month of May, and then on the first day of that June meeting we get another CPI [report] and that needs to be much hotter," Siegel said.

"If those three things happen, which I think are extremely low probability, then I think another quarter point [interest rate hike] might be on the table," he added. 

On the flip side, the bar is also high for the Fed to cut interest rates, according to the professor, who highlighted that as long as people hold onto their jobs, the Fed will likely hold steady.

"Here's the bar for them to lower [interest] rates. You gotta have a negative payroll. One or two negative payrolls. Don't forget we're getting into political season. If we get a negative payroll that's going to hit headlines... all you need is a couple of negative payrolls and a rise in the unemployment rate, and the political pressure [is] on the Fed," Siegel said.

The April jobs report came in stronger than expected last week, with 253,000 jobs added to the economy. And weekly jobless claims continue to hover at levels lower than before the COVID-19 pandemic. That means the labor market is still on solid footing.  

But if the job market starts to unravel, and if a mild recession appears in the economy, then the Fed can get serious about lowering interest rates, which the stock market would love.

"You have to see negative payrolls. It's not impossible, certainly. That's when the talk will begin on maybe lowering rates and two or three of those [negative monthly payrolls] combined, and I think by the fall we might actually see them notch down rates," Siegel said.

Such a scenario would set the stock market up well for strong returns in fourth quarter of this year and into 2024, according to Siegel.  

"We might have a mild recession. I think what the market really wants [is that the] Fed will recognize that, won't raise rates anymore, and will start thinking of lowering rates, and that could set us up for a good fourth quarter."

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