Jim Chanos says the notion that the Fed will always bail out the stock market is dangerous

James Chanos and Leon Cooperman at the 2019 Delivering Alpa conference in New York on Sept. 19. 2019.
Adam Jeffery | CNBC

Short-seller Jim Chanos said the belief that the Federal Reserve will always rescue the stock market from steep losses is reckless for investors.

"The idea of a Fed put and that the Fed is always going to be there to bail out my bad investment decisions is really not cogent investment policy to hold onto for a long time," Chanos said on CNBC's "Halftime Report" on Monday.

"The fact that it will bail out the stock market at some pre-determined level of losses... I think it's a very dangerous idea to uphold," he added.

The market sell-off accelerated Monday, with the Dow dropping as much as 1,100 points, as investors braced for a potential hawkish tilt from the Federal Reserve this week. The S&P 500 also dipped into correction territory, falling more than 10% from its record high.

The Fed will wrap up its policy meeting on Wednesday. Central bankers have indicated that they expect not only to raise rates and taper asset purchases soon — but also could be teeing up a balance sheet reduction. The potential move from the Fed would mark an aggressive policy change after nearly two years of the most accommodative monetary policy in U.S. history.

The central bank last raised rates in late 2018, part of a "normalization" process that happened in the waning period of the record-long economic expansion.

Chanos called the 2018 rate hike "a big error" from the Fed, which caused a significant sell-off in the stock market.

The longtime investor said despite the sharp decline in stocks recently, his hedge fund is still slightly net long on the market. He added that investors should avoid names with high-flying multiples.

Chanos, the founder of Kynikos Associates, is a famed short seller on Wall Street with a long history of identifying fraud.