Credit fears may scare off the Fed: McDonald

Betting on a hawkish or dovish Fed? One day short of the long-awaited FOMC meeting and a strategist explains the relationship between the credit market and the Fed's expected decision to raise interest rates.

"Credit risk could veto the Fed's policy path in 2016," Larry McDonald, Societe Generale's head of U.S. strategy, told CNBC's "Power Lunch" on Tuesday.

As China has been devaluating the yuan — without a controlled plan — it's exporting deflation, weakening currencies around emerging markets. That, in turn, has an dramatic impact on credit, he said.

"Since Lehman, we've had about $7 trillion denominated debt in the world, new debt — That's dollar denominated," he said.

In terms of the U.S. economy, McDonald said that it is a much smaller portion of the global economy today.

"There's $60 trillion of economic activity outside of the United States... so you can't just look at the U.S.," he noted.

With the stronger dollar surging against foreign currencies, the Fed is going to tighten, and that "creates the genesis of a credit crisis," McDonald said.

"Credit in 2007 changed the Fed policy path, and the same dynamics are happening today," he said. "The Fed wants to do a number of hikes next year, but the credit market can overrule them."