Fed decision could be game changer for markets, Wells Fargo's rate expert predicts

Stock market’s dramatic drop won’t change Fed’s path: Wells Fargo

It's the event that will turn the markets. The question is: in which direction?

The Federal Reserve will deliver its decision on interest rates Wednesday afternoon, and many of the largest financial firms — including Wells Fargo — hope it will calm down Wall Street.

"Will the FOMC say effectively, 'Hey, we're data dependent. It's meeting to meeting,' or will the Fed lead the market to think a couple of more hikes and we're more or less done? That's really the crux of the matter," said Michael Schumacher, Wells Fargo's global head of rate strategy.

Schumacher predicted Tuesday on CNBC's "Futures Now" that the Fed will scale back the number of rate hikes next year.

Despite that prediction, Schumacher doesn't believe it will have anything to do with the ongoing stock market correction.

"Think back to late January, early February. During that time the S&P fell about 10 percent in two weeks," he said. "The drop recently has been dramatic, but not that dramatic. Did that change the Fed's path? No. Is it going to change it this time? We doubt it."

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At this Fed meeting, Schumacher expects policymakers to boost their short-term interest rate target by a quarter point, which is in line with the Street's consensus. The move would bring the Fed funds rate to 2.50 percent from 2.25 percent.

As for next year, he predicts the Fed will signal two rate hikes, rather than the once-expected three.

"A new set of dots comes out," Schumacher said. "Will the Fed actually have three hikes implied for 2019? We doubt it."

According to Schumacher, fewer hikes will help stabilize stocks and keep the 10-Year Treasury yield below 4 percent. Right now, the yield is around 2.8 percent.

"The end of 2019, we think 10s conclude in the mid-3s. Let's call it 3.40 [percent]," said Schumacher. "For the , we've got just above — a little bit about — 3, let's call it 3.05 [percent.] So, a 35 basis point difference between the 2 and the 10 year. So, we're moderately bearish. We call for a steeper curve and lots of [volatility]."