David Rubenstein: A 100 Basis Points Rate Increase Would be a Market Shock

• At its meeting this week, the Federal Reserve is likely to continue raising rates by 75 basis point.
• David Rubenstein stated that the Fed should not expand beyond its current size. 
• The Fed will release its highly-anticipated September policy announcement on Wednesday. 

According to David Rubenstein, co-founder of Carlyle Group, the Federal Reserve will not attack high inflation by imposing a huge rate increase of 100 basis points at its policy meeting this week. This would be a surprise for investors and raise concerns about rising consumer prices. 

“The Fed has been telegraphing 75 base points. Rubenstein stated that 100 basis point would shock the market if they went to it. Interview on Monday televised. 

“I know that a small percentage of the market, perhaps 14%, believe it may be 100 basis point, but I doubt they would want the market to shock that way.” Rubenstein’s latest book, “How to Invest Master on the Craft,” was published last week. 

Tuesday will see the Fed’s first meeting. A policy decision is expected Wednesday. The Fed has increased the fed funds rate four more times in 2022, to a range between 2.25% and 2.5%. This includes two consecutive increases of three-quarters percent. 

“The Fed seems to believe that if they did 100 basis points, people would react by saying that they know inflation is worse than they think. He stated that he believed it would likely depress markets more than it did last week. 

Last week, stocks in the US suffered their worst week since June. August inflation was less than expected. The Nasdaq CompositeThe drop was approximately 5.5% S&P 500Inflation fell 4.1%  The headline inflation rate of 8.3% was lower than expected at 8.1%. Consumer price inflation is hovering around a four-decade high. 

The Fed’s aggressive policy of raising interest rates to lower high inflation by slowing down economic activity led to US stocks falling into a bearish market. The Nasdaq Composite is home to large-cap tech stocks and has dropped 26%. The S&P 500 has declined 18%. Both indexes were lower than their lowest point of the year. 

This year has seen a bearish trend in the Treasury market, with yields rising and bond prices falling. Fed policy sensitive 2-year Treasury note yield Tuesday’s reading was 3.97%, an all-time high of 15 years. The Ten-year Treasury yieldThe yield curve inversion rose to 3.56%, an 11-year record. The yield curve inversion is often a warning sign of economic depression.