Wells Fargo lists financial instability as biggest economic risk post-Fed decision

A major Wall Street firm is ranking financial instability over inflation as the biggest economic risk for the next three months.

In an interview following the Federal Reserve’s quarter point interest rate hike, Wells Fargo Securities’ Michael Schumacher suggested policymakers are underestimating how quickly tightening credit conditions could hurt the economy.

“The Fed is not really giving enough credence to the idea that tighter credit means things weaken in a fairly quick manner,” the firm’s head of macro strategy told CNBC’s “Fast Money” on Wednesday.

He estimates it will take a month or two to get clarity on credit conditions.

“It’s hard to say right now whether the Fed has tightened enough or too much,” said Schumacher. “That’s why the market has been bouncing around so much —whether it’s the equity market or the bond market. People are trying to get a read on this.”

On Wednesday, stocks closed at their lows for the session. The Dow fell 530 points, breaking a two-day win streak. The S&P 500 and tech-heavy Nasdaq also closed lower.

As long as the financial sector can avoid another meltdown, Schumacher believes the Fed will hold interest rates higher for longer because inflation is still too high.

“We’re telling clients the Fed probably hikes 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.”

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