It’s a move that would likely trigger panic on Wall Street.
But Wells Fargo Securities’ Michael Schumacher suggests the Federal Reserve is raising rates too slowly, telling CNBC’s Fast Money that he would seriously consider a 150 basis point hike this week if he were Chairman Jerome Powell would be.
“The Fed knows the target. So the overnight rate, the cap, is now 2.5%. It’s very likely to rise above 4% this year,” the company’s head of macro strategy said on Tuesday. “Why not just rip the plaster off. Let’s get there in one day. But of course the Fed will not do that.”
He concedes that it would be a difficult maneuver to pull off without violently shaking markets. The key is that policymakers need to convince investors that the historic hike in interest rates is only just beginning, Schumacher said.
“It would make a big move and then stall or stop very soon. The big fear in the market would be, ‘Oh my god, they’re going to make a record-breaking move.’ What will happen next month or the month after that? “We’d better get out of the way,” said Schumacher. “It would take incredibly good communication and trust or the result: Carnage. And nobody wants that.”
Based on this month’s CNBC Fed survey, The Street believes the Fed will hike rates by 75 basis points on Wednesday. It would be the Fed’s fifth rate hike this year.
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Schumacher believes the Street has their September session rate forecast correct. But he warns Powell is likely to be more hawkish during Wednesday’s news conference because of high inflation.
“If you look at the last 10+ years, we’ve had incredibly easy monetary policy most of the time. Super stimulus fiscal policy in many cases, especially in the US, so a very quick turnaround – I suspect it’s going to be very bumpy. It was rocky,” said Schumacher. “To think things will go smoothly from here is probably a big leap.
The Dow, S&P 500 and Nasdaq are all down one percent on Tuesday and have fallen in three of the past four sessions. Since the July Fed meeting, the Dow and Nasdaq are down about 5%, while the S&P is down 4%.
And government bond yields are rising rapidly. The yield on the 2-year government bond hit its highest level since 2007. It’s a place Schumacher recommends for investors due to its relative safety.
“Look at the front of the US Treasury curve. The 2-year Treasury yield is only about 4%. It’s going up enormously,” said Schumacher. “If you think about the real yield that a lot of people in the bond market are looking for, that’s probably not a bad place to hide. Take a short-term position, sit there for a few months.” [and] Look at what the Federal Reserve is doing and then act.”
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