It’s a move that would likely cause panic on Wall Street.
But Michael Schumacher of Wells Fargo Securities suggests the Federal Reserve is raising interest 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.
“The Fed knows the destination. So the interest rate is now, the upper bound, 2.5%. Very likely it will go to 4% this year,” the company’s head of macro strategy said on Tuesday. ‘Why don’t you just pick the band-aid. Let’s be there in one day. But of course the Fed doesn’t do that.’
He acknowledges that it would be a difficult maneuver to pull off without violently shaking the markets. The key is that policymakers need to convince investors that the historic rise in interest rates, according to Schumacher, is done in advance.
“It would make a huge move and then stop or stop pretty quickly. The big fear in the market would be, ‘oh my god, they’ve done a record-breaking move. What’s going to happen next month or the month after that? We better get out of the way,” Schumacher said. “It would require incredibly good communication and trust or the result: Carnage. And nobody wants that.”
Based on this month’s CNBC Fed Survey, The Street expects the Fed to raise interest rates by 75 basis points on Wednesday. It would be the Fed’s fifth rate hike this year.
Schumacher believes The Street is correct in its September meeting rate forecast. But he warns that Powell will likely be more aggressive during Wednesday’s press conference due to high inflation.
“If you look at the last ten years, we’ve had incredibly easy monetary policy for most of that time. Super-stimulative fiscal policy in many cases, especially the US. I suspect it’s going to be very rocky. It’s already been rocky, Schumacher noted. “To think it would somehow run smoothly from here is probably a big leap.”
The Dow, S&P 500 and Nasdaq fell one percent Tuesday and are down three of the last 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 of 2-year Treasury Note reached its highest level since 2007. It is a place Schumacher recommends to investors for relative safety.
“Look at the front of the US Treasury curve. You have the 2-year Treasury bond yielding about 4%. It’s gone up a lot,” Schumacher said. “If you think about the real returns, which is what a lot of people in the bond market focus on, it’s probably not a bad place to hide. Take a short duration position, sit there for a few months [and] see what the Federal Reserve is doing and then react.”