A major Wall Street firm ranks financial instability ahead of inflation as the biggest economic risk for the next three months.
In an interview after the Federal Reserve’s quarter-point interest rate hike, Michael Schumacher of Wells Fargo Securities suggested policymakers are underestimating how quickly tightening credit conditions can hurt the economy.
“The Fed doesn’t really give enough credence to the idea that tighter credit means that things weaken in a fairly quick way,” the firm’s head of macro strategy told CNBC’s “Fast Money” on Wednesday.
He estimates that it will take a month or two to get clarity on the credit situation.
“It’s hard to say right now whether the Fed has tightened enough or too much,” Schumacher said. “That’s why the market has jumped around so much — whether it’s the stock market or the bond market. People are trying to get a handle on this.”
On Wednesday, shares closed at their lowest level for the session. The Dow fell 530 points, snapping a two-day winning streak. The S&P 500 and technology-heavy Nasdaq also closed lower.
As long as the financial sector can avoid another meltdown, Schumacher believes the Fed will keep interest rates higher for longer because inflation remains too high.
“We are telling clients that the Fed is likely to raise interest rates one more time. [But] not a lot of confidence around that call,” Schumacher said. “We’d be shocked if it was more than that.”