Fed should raise interest rates by 150 basis points: Wells Fargo

Too soft on inflation?  Wells Fargo believes the Fed should hike by at least a full point

It’s a move that is likely to cause 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.

“The Fed knows what the destination is. So it now has the funds rate, the upper limit is 2.5%. Very likely it will get to 4%-plus this year,” the firm’s head of macro strategy said on Tuesday. “Why not just rip the bandage off. Let’s get there in a day. But of course the Fed won’t do that.”

He acknowledges that it would be a tough maneuver to manage without violently shaking the markets. The key is for policymakers to convince investors that the historic jump in interest rates is pre-loaded, according to Schumacher.

“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 made a record move. What’s going to happen next month or the month after that? We better come out of the way,” Schumacher said. “It would require incredibly good communication and confidence or the result: Carnage. And nobody wants that.”

Based on this month’s CNBC Fed Survey, the Street believes the Fed will raise interest rates by 75 basis points on Wednesday. It would be the Fed’s fifth hike this year.

Schumacher believes the Street has the right forecast for the meeting’s September meeting. But he warns that Powell is likely to be more hawkish during Wednesday’s news conference because of warm inflation.

“When you think about the last 10 years plus, we’ve had incredibly easy monetary policy for most of that time. Super stimulative fiscal policy in many cases, especially the U.S. So I’m doing a very quick U-turn — I suspect that it’s going to be very rocky. It’s already been rocky,” noted Schumacher. “To think it would somehow be smooth sailing from here is probably a big leap.”

The Dow, S&P 500 and Nasdaq fell one percent on Tuesday and have fallen three out 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%.

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And the Treasury yield is rising rapidly. The 2-year Treasury yield hit its highest level since 2007. It’s a place Schumacher recommends to investors for relative safety.

“Look at the front end of the US Treasury curve. You have the 2-year Treasury yielding only about 4%. That’s gone up tremendously,” Schumacher said. “If you think about the real return that 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 couple of months [and] see what the Federal Reserve is doing and then react.”


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