Too many Fed rate cuts could cause stocks to outrun economy, warns money manager of $140 billion

Key Points
  • The Fed should be careful not to cut interest rates too many times because the stock market could overheat, says Ares Management chief Michael Arougheti.
  • Based on the companies he invests in, Arougheti says the economy still looks strong, and that may warrant holding rates steady.
  • However, former hedge fund manager Michael Novogratz says, "The last four cycles were at least three cuts. I'd expect at least three cuts."
Stock market could overheat if Fed cuts too many times, says Ares CEO

The Federal Reserve should be careful not to cut interest rates too many times because the stock market could overheat, according to a private equity chief whose firm oversees more than $140 billion.

"I think the risk when we're talking about prolonged cuts is … asset values could outrun the economy," Ares Management co-founder and CEO Michael Arougheti told CNBC on Thursday. His comments came a day after the Fed reduced the cost of borrowing money by 0.25% and central bank chief Jerome Powell signaled the move could be a one-and-done situation.

Powell didn't necessarily make the wrong decision on rates, Arougheti said in a "Squawk Box" interview. "But in the communication, he could have been a little clearer."

That confusion caused a sharp sell-off in stocks Wednesday, with the Dow Jones Industrial Average and S&P 500 posting their biggest one-session losses in two months. Investors remained cautious at the Thursday open on Wall Street. But by midmorning, stocks were taking off on hopes for more cuts, but turned lower by midafternoon.

Arougheti said the economy may warrant holding steady for a while. "We have 1,700 middle-market companies in our portfolio. We touch about 800,000 consumer loans. We probably touch 30,000 small businesses. And everything we're seeing in our portfolio says the U.S. economy is on unbelievably strong footing."

The markets, however, are not ready to give up on the notion of additional cuts, with 56% odds on another cut at the central bank's September policy meeting and the chances increasing as the year progresses, according to the CME FedWatch tracker Thursday morning.

Going with the consensus

Michael Novogratz, ex-hedge fund manager at Fortress Investment Group and former Goldman Sachs partner, tends to go with the market consensus, saying that Powell was "relatively clear that this was an insurance cut."

"You don't buy insurance once," Novogratz told CNBC in a later interview. "The last four cycles were at least three cuts. I'd expect at least three cuts. They are going to cut again next month."

"You have a decent U.S. economy. You're throwing fuel on it. You could see the stocks go higher," said Novogratz, founder of cryptocurrency-focused firm Galaxy Digital.

Critics of the Fed's policy of holding rates at historically, near-zero levels for too long after the 2008 financial crisis argue that stocks were, and maybe still are, being artificially pushed higher. Investors were forced to take risks they might not have otherwise because there was no real alternative to the market.

"I think we're long in the cycle," cautioned Novogratz. "This could be the last leg of this giant, decade-long liquidity-driven rally. When you really step back, the macro is dangerous and you're going to surf this last leg of the rally."