- Stocks will be hurt by the Fed leaving interest rates higher for a longer period, Wells Fargo's Mike Schumacher says.
- The key rate could stay at 5% for up to a year, Mike Schumacher told Bloomberg TV.
The Federal Reserve is likely to leave interest rates elevated for a considerable amount of time, a move that would keep pressure on stocks, according to Wells Fargo's head of macro strategy.
Investors have been trying to gauge when the Fed will hit pause on hiking interest rates after the central bank this year embarked on an aggressive path to get high inflation under control.
"But I think the thing people really need to focus on the most is how long does the Fed keep that fed funds rate really high," Mike Schumacher at Wells Fargo Securities, said in an interview with Bloomberg TV on Monday.
"So let's say up to 5%. We think it's going to be a long time - six plus months, maybe a year. That's going to hurt equities, we think, and that's going to hurt risk," he said.
Investors propelled stocks higher on Friday on potential indications the Fed may reduce the size of its massive rate increases after its meeting on November 1-2. The Federal Open Market Committee has raised the benchmark rate by 75 basis points at its past three meetings.
"So let's say the Fed goes 75 next week and follows that up with a 50 at the next meeting. Is that really an amazing result for risk investors? I would say not. And ultimately, the destination matters in terms of terminal rate," said Schumacher. The terminal rate is where the federal funds rate will land before policymakers decide it's time to start cutting it down.
US stocks have plunged into a bear market this year as the Fed has quickly pushed up its benchmark borrowing rate to a current range of 3% to 3.25% from the zero starting point. The S&P 500 has lost about 21% this year but has come off weaker levels. The Nasdaq Composite has dropped 31% during 2022.
Investors on Friday appeared to embrace signs the Fed is preparing to reduce the size of its rate hikes. The Wall Street Journal reported Fed officials next week will likely debate whether and how to signal plans to approve a smaller rate increase at its December meeting.
Separately, San Francisco Federal Reserve President Mary Daly said the markets should consider that the Fed will not always stick with raising rates by three-quarters of a percentage point. Overtightening interest rates can put the economy "into an unforced downturn," she said.