Next Fed rate hike to spark dangerous game in financial system: Peter Boockvar

The market’s violent response to hotter-than-expected inflation might usher in extra losses.

Investor Peter Boockvar believes Wall Street is coming to grips with a painful actuality: Inflation is not moderating, so the Federal Reserve will not pivot.

“After next week’s rate hike, we’re going to start playing a dangerous game with the state of the economy. The next rate hike is going to be only the second time in 40 years that the Fed funds rate is going to exceed the prior peak in a rate hiking cycle,” the Bleakley Advisory Group chief funding officer advised CNBC’s “Fast Money” on Tuesday. “We’re getting into treacherous waters.”

According to Boockvar, a 3/4 level hike at subsequent week’s Fed assembly is just about a carried out deal — regardless of indicators of softer commodity costs and used automobile costs slowing down.

“The BLS [Bureau of Labor Statistics] lags in how it captures that. So, that’s why we have this sort of two-lane highway with both sides going in opposite directions,” mentioned Boockvar. “We rallied 200 S&P points in the four days leading into today [Tuesday] because the markets are driving on one side, and the BLS hasn’t yet captured that. Unfortunately, the Fed is also lagging in terms of how they’re reacting to things. They’re driving also with a rear-view mirror type of mentality.”

The main indexes fell to June 2020 lows after the August client worth index [CPI] rose by 0.1% to 8.3% over the previous 12 months. A significant drop in gasoline costs failed to offset rising shelter, meals and medical care prices. According to Dow Jones, economists thought the index would fall by 0.1%.

The inflation transfer greater prompted Nomura to formally modified its rate hike forecast. It now expects the Fed to elevate charges by a full level on the subsequent assembly.

Boockvar, a CNBC contributor, would not count on the Fed to go that far. However, he warns traders will nonetheless have to cope with the financial penalties from wealth destruction to earnings declines.

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“If labor costs remain sticky, if they continue to rise at the same time the revenue side starts to slow in the face of this slowing economy, you’re going to have further cuts in earnings estimates at the same time,” he mentioned. “I don’t think this market just ends with a [p/e] multiple at 17x.”

Boockvar believes multiples will finally be 15x or decrease.

CNBC “Fast Money” dealer Brian Kelly additionally sees extra bother for shares and the financial system, significantly housing.

“We’re just barely seeing the cracks in housing. So, as that starts to come down, people are going to feel like they had less money than they did before… And then, we don’t know what that’s going to do to the economy,” he mentioned. “This 75 [basis point rate hike] might even be a mistake. We know there’s a lag.”

And, that might even be an excessive amount of for the financial system to deal with.

“This is a Federal Reserve that could not raise interest rates 25 basis points in 2018 and actually turned the market into a convulsion, and ultimately they had to step back in and begin this easing process,” Tim Seymour, one other “Fast Money” dealer, added. “We went from a place where we could not raise rates even in good times let alone difficult times.”

The subsequent Fed assembly is from Sept. 20 to 21.

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