It’s a move that would likely cause a panic on Wall Street.
But Wells Fargo Securities’ Michael Schumacher suggests the Fed 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.
“The Fed knows what the destination is. So now they have the funds rate, the upper limit is 2.5%. It is very likely to go above 4% this year,” said the firm’s chief macro strategist. on Tuesday. “Why not just rip off the Band-Aid? Let’s get there in a day. But of course the Fed won’t do that.”
He acknowledges that it would be a difficult move to pull off without violently shaking markets. The key is that policymakers must convince investors that the historic jump in rates is anticipated, according to Schumacher.
“It would make a big move and then stop or stop very soon. The big fear in the market would be ‘My God, they’ve made a record size move. What’s going to happen next month or the month after that? It will be we better get out of the way,'” Schumacher said. “It would require unbelievably good communication and trust or the result: Carnage. And nobody wants that.”
According to this month’s CNBC Fed Survey, Street thinks the Fed will raise rates by 75 basis points on Wednesday. It would be the Fed’s fifth hike this year.
Schumacher believes that Street has the correct forecast for the September meeting rate. But he cautions that Powell is likely to be more aggressive during Wednesday’s news conference because of soaring inflation.
“When you look at the last 10 years or so, we’ve had incredibly easy monetary policy for most of that time. Over-stimulus fiscal policy in many cases, especially in the US. I suspect it’s going to be very rocky. It’s already been rocky.” Schumacher noted. “To think that it would somehow go well from here is probably a big jump.”
The Dow, S&P 500 and Nasdaq fell 1 percent on Tuesday and are down three of the last four sessions. Since the July Fed meeting, the Dow Jones and Nasdaq are down 5%, while the S&P is down 4%.
And Treasury yields are rising fast. The 2-year Treasury bond yield hit its highest level since 2007. It’s a spot Schumacher recommends to investors for its relative safety.
“Look at the front end of the US Treasury curve. It has a 2-year Treasury yield of only about 4%. It’s up tremendously,” Schumacher said. “If you think about real yield, which a lot of people in the bond market focus on, it’s probably not a bad place to hide. Take a short position, sit there for a few months [and] see what the Federal Reserve does and then react.