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Nobel Prize winner Robert Shiller makes the case for a rate hike: The economy is running 'hot'

A rate hike would 'cool' this market a little bit, Nobel Prize winner Robert Shiller says
A rate hike would 'cool' this market a little bit, Robert Shiller says

Nobel-prize winning economist Robert Shiller sees justification for a quarter-point interest rate hike.

That's right: A hike — not the cut Wall Street is expecting Wednesday from the Federal Reserve.

"We still have a very low unemployment rate. The economy is hot," the Yale University professor told CNBC's "Trading Nation" on Monday. "One could easily make a case for staying the course and doing another interest rate increase at this meeting to cool this economy."

If the Fed slashes rates, it'll be the first time since December 2008 amidst the financial crisis. Even though Shiller says the Fed is doing a "brilliant job" navigating the twists and turns of the market and economy, he questions whether a move lower is necessary.

"While the inflation rate is below the target, it's not that much more below it. The target is 2% and the inflation rate is 1.5%," said Shiller. "We just set a new record. We passed 3,000 on the S&P 500. We are at a really high market."

The S&P, Dow and Nasdaq are on pace for their sixth positive month in seven and are fractions of a percent off their all-time highs. Since the Christmas Eve meltdown, the S&P and Dow have surged at least 25% while the tech-heavy Nasdaq is up almost 35%.

It's a rally that could lead to a historic drop, according to Shiller. Since 2016, he has been comparing similarities between the current bull market and 1929. Now, stocks are even more expensive, and he's not sure a rate hike would foil a potential crash.

"The Fed raised interest rates just before the stock market in 1929 crashed. They were concerned about overvaluation of the market and wanted to cool it," he said. "It didn't cool it very effectively. It caused a disaster. I'm a historian. I think about those things."

'There is a risk of being in a bad situation'

Despite Shiller's concerns, he doesn't see any near-term indications of a depression or even a recession. Plus, he's not ruling out a market that continues to break out to new highs this year.

However, he warns a Fed that is too easy could eventually set the stage for a painful crash.

"There is too much history of governments overpowering the wisdom of the central bankers and ending up ultimately in inflation," Shiller said. "It might take a while to get started, but eventually there is a risk of being in a bad situation."

A rate hike may be what the market really needs, Nobel Prize winner Robert Shiller suggests
A rate hike may be what the market really needs: economist Robert Shiller