- Investors should be worried if the Federal Reserve doesn't raise interest rates next week, according to Steve Eisman.
- "If the Fed is scared, you should be scared," the "Big Short" investor told CNBC.
- Traders upped their bets on a Fed pause after the US's regional banking crisis rocked markets.
Investors should start worrying if the US regional banking crisis forces the Federal Reserve to halt its interest-rate hiking campaign next week, Steve Eisman has warned.
The "Big Short" investor said Wednesday that it'd be a bad sign for markets if the central bank chooses not to raise the cost of borrowing – rather than bringing in the 25-basis-point hike that traders are expecting – next week.
"Fifty basis points is off the table," Eisman told CNBC's "Fast Money". "So either they're going to do 25 basis points or they're going to do nothing."
"If the Fed doesn't raise rates … maybe it'll be positive for a couple hours or a couple of weeks," he added. "But the Fed won't be raising rates because it's scared."
"If the Fed is scared, you should be scared."
The central bank has lifted interest rates from near zero to just under 5% over the past year in a bid to tame inflation, which is still running way clear of its 2% target level, hitting 6% last month.
Until last week, traders expected the Fed to press ahead with its tightening campaign by increasing rates by either 25 or 50 basis points when its next meeting ends on March 22.
But the collapse of three banks over the past week or so – SVB Financial, Signature, and Silvergate Capital – has led to a flurry of bets that the central bank will pause its war on inflation to soothe financial markets.
Traders were 50/50 on whether rates would rise at all, according to CME Group's Fedwatch tool – although around three-quarters were anticipating a 25-point hike as of Thursday's premarket.
The central bank is in a difficult position because inflation could flare up again if it does stop tightening, according to Eisman.
"If the Fed raises rates, even in the face of this, that's like, wait a minute, you've sort of caught between a rock and a hard place," he told CNBC. "Financial conditions are really tightened, but you still have inflation."
"It's not clear either move is good," Eisman added.
Eisman's bearishness clashes with the consensus view on Wall Street – that a Fed pause could be good news for stocks.
When interest rates stop rising, equities tend to rally because it's cheaper for companies to borrow money. That boosts the future cash flows that make up a core part of their valuations.