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A New Fed Rate Hike Can Permanently Cripple The U.S. Economy

Amid discussions of a new rescue plan by America’s top banking CEOs and the Federal Reserve’s two-day meeting, one market expert has warned of a “very dire situation” dependent on fiscal policy.

Founder of Michael Lee Strategy, Mike Lee, spoke on “Mornings with Maria” on Tuesday, stating that if the Federal Reserve cannot continue raising rates as necessary and if persistently high inflation persists, the situation could be catastrophic. 

Lee said, “What I see is not so much as a contagion from banks or some sort of massive solvency crisis, it’s what do we do if the Fed can’t raise anymore, can’t keep tightening? It has to ease, so there are no systemic shocks from the banking system.”

The Fed began its latest interest rate decision as the market rallied strongly on Tuesday morning. As a result, 62% of investors expect policymakers to continue hiking rates, marking the ninth straight increase, while 38% expect no change, according to CME’s FedWatch.

Although Chairman Jerome Powell has undertaken the most aggressive rate hike path since the 1980s to combat stubbornly high inflation, a recent report from US economists indicates that if history repeats itself, the Fed will find it challenging to avoid a recession later this year.

This week, the central bank is also dealing with bank-run contagion fears following the recent insolvencies of Silicon Valley Bank, Signature Bank, and potentially First Republic Bank.

Lee argues that the banking and rate hike issues relate to “confidence,” rather than structural issues. He stated, “No matter how good the banking laws are, no matter how good the oversight is, no matter how strong your balance sheet is, nobody can withstand a 20 to 25% deposit base withdrawal in a single day, as happened with Silicon Valley Bank.”

Bulltick Capital’s chief market strategist Kathryn Rooney Vera also agrees with Lee, saying that the Fed will likely raise rates by 25 basis points on Wednesday.

“It has to hike 25 basis points. It has a dual mandate, 2% inflation and full employment, it has to comply with that. If they do not hike this week, tomorrow will be a huge additional shock to credibility, and they’re very focused on that,” Rooney Vera said. “So they have to recoup credibility. If they do not hike 25, I think the markets will poorly receive it.”

Michael Wilson, chief U.S. equity strategist at Morgan Stanley, also weighed in on the discussion. On Monday, he said in an analyst note that the stock market is in the early and painful stages of exiting the bear market that began in the summer.

“The last part of the bear can be vicious and highly correlated,” he said. “Prices fall sharply via an equity risk premium spike that is hard to prevent or defend in one’s portfolio.”