Market correction could hit once Wall Street realizes fewer rate cuts are coming, Blackstone warns

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The Fed and markets are on a collision course over rates, Blackstone warns

Blackstone chief investment strategist Joseph Zidle believes the Federal Reserve and markets are on a collision course over interest rates.

Zidle predicts the Fed will cut rates by a quarter point Wednesday but says Wall Street won't get what it wants, and stocks could fall 10% to 20% — ranging from a correction to a bear market.

"The market is demanding upwards of 100 basis points of interest rate cuts on top of what we saw in July," he told CNBC's "Futures Now" on Tuesday. He said he expects another 25 basis point cut in October, "but at that point, my guess is that the Fed is then on hold."

Zidle recognizes the central bank's desire to place U.S. interest rates more in line with the rest of the world. But with inflation pressures building at home, he sees Fed Chief Jerome Powell facing a conundrum.

"The markets are saying to the Fed, 'Think globally. Rates around the world are so low, you've got to cut our rates lower.' But the Fed is going to have to respond to local data," Zidle said. "They are going to have to act locally which I think is going to constrain them from giving the market all it wants."

According to Zidle, rising inflation is reflected in the latest produce price index, consumer price index and wage growth figures.

"The markets are set up for a disappointment. They're going to have to re-rate their expectations," he added.

Zidle also points out that economic and earnings growth have been slowing.

"You've got a market that this year has traded off of hopes for coordinated global central bank easing," he said. "That's the only reason why we're up 20% year to date. We're certainly not there because of fundamentals."

Zidle's year-end S&P 500 price target is 2,875, a 4% drop from Tuesday's close. However, he warns that stocks are vulnerable to an even bigger setback before year's end.

"Any bull market can produce 10-20% pullbacks. We saw that in the fourth quarter of last year," Zidle said. "I wouldn't rule out something that's on the order of 10-20%."

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