US Markets

The world economy can't handle even one US rate hike, strategist Sri-Kumar says

Expect 'one-a-year' Yellen hike in 2017: Pro
Expect 'one-a-year' Yellen hike in 2017: Pro

Even one small interest rate increase by the Fed could have a sweeping impact on U.S. and world economies, Komal Sri-Kumar told CNBC on Monday.

"I think they are going to hike" on March 15, Sri-Kumar said on "Squawk Box," echoing a theory shared by many analysts. "But that is going to prompt capital outflows from the euro zone, especially with the political risk. It is going to increase the capital outflow from China, and the U.S. economy will feel the impact."

These moves would strengthen the dollar against other currencies, putting downward pressure on the euro, said Sri-Kumar, president of Sri-Kumar Global Strategies.

He acknowledged that some of that pressure "is probably good for the European economy from a trade perspective" because European exports would become cheaper to foreign partners.

"The problem is in terms of capital outflows," he said, cautioning that divestment in Europe could raise risk in overseas markets. "These economies, despite some positive numbers, ... they are not in strong enough shape to take an increase in interest rates on the part of the United States."

The reason for this weakness in global markets stems from a long period of liquidity, or market price stability, according to Sri-Kumar.

"We have had too long a period of excessive liquidity," he said. "The markets have been distorted. The bond yields are very, very low, much lower than they would have been in the absence of quantitative easing and zero interest rate policy."

As a result, small changes in the U.S. economy reverberate worldwide, Sri-Kumar said, adding that had the Fed started hiking rates as the country emerged from the 2008 financial crisis, the United States may have been better off.

The strategist argued that if rate normalization had started in 2009, bond yields would be up, equity markets would be rising on the back of fundamentals rather than liquidity creation, and the economy would be improving more rapidly.

"I said they should have raised by 1 to 1½ percentage points three years ago. The markets would have taken a hit, but we would be on the way up. But if you do this Chinese water torture in terms of slight increases, you are not going to get sustained economic growth," Sri-Kumar said.

Sri-Kumar predicted that once the Fed sees the impact of its expected March hike, Fed Chair Janet Yellen will become "a once-a-year Yellen in 2017 as well."