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Peter Tchir at Brean Capital thinks the recent stock market chaos is the reason for the Federal Reserve to raise rates in September.

Amid the recent sell-off in US markets, conventional wisdom has coalesced around the idea that the Federal Reserve’s plan to raise interest rates will now have to be put on hold.

Certainly past September, but perhaps indefinitely.

But in a note to clients following the market close on Tuesday, Tchir argued the opposite: That is exactly what the Fed needs to act. And soon.

Here’s Tchir:

Quite frankly, I don’t care if someone wants to panic and sell stocks because the Fed hiked a measly 25 bps. I am quite convinced that this Fed will remain data dependent. If the economy deteriorates after the hike, they will cut. Or they will do QE4. I still bet that we see QE4 before 1.00% of Fed Funds, but I think the right move is to hike in September.

Not hiking sends too many wrong signals to markets. Hiking clears the path for the real take off.

How much more comfortable would I be buying a rallying S&P 500 knowing that the first hike is off the table and been absorbed? The answer is a lot more comfortable. Once we can get past the zero bound we can lose this erroneous fixation on when the first hike is and think properly about the path.

On Tuesday, markets finished lower for the sixth straight day as the US averages gave up all of their gains and then some, with the Dow’s intraday tailspin adding up to a loss of more than 600 points.

But amid all of this volatility, Tchir thinks that the Fed needs to simply “rip the band-aid” and, in a sense, just do what the markets have been so nervously anticipating for most all of this year: raise rates.

Tchir’s note, however, doesn’t exactly endorse the Fed’s decision to seemingly put itself in this box.

“They have potentially created a monster by causing mis-allocation of capital and rewarding certain investment behaviors which may not be the most prudent,” Tchir writes.

“Hiking rates is always going to be a concern for equity markets. So here, you can say you won’t hike, let stocks rally and in all likelihood create an even bigger problem down the road.”

But in his view, the Fed hiking rates now, even in the face of unsettled financial markets, will at least give it flexibility in the future.

As reported by Business Insider