David Tepper says the Fed needs to cut rates at least two or three times to keep its credibility

Appaloosa Management’s David Tepper said investors should believe the Federal Reserve when it says it will cut interest rates because the central bank needs to maintain credibility.

“You just read what these guys are saying,” Tepper said on CNBC’s “Squawk Box” Thursday. “Powell told you something…He told you some kind of recalibration. It has to follow somehow. I’m not that smart. I just read what they say and have conviction. They usually do what they say, mostly. when they have this level of conviction.”

The Fed last week cut interest rates by half a percentage point, kicking off its first easing campaign in four years with an aggressive move despite a fairly stable economy. In addition to this cut, the central bank indicated in a “dot plot” the equivalent of another 50 basis points of cuts by the end of the year.

Fed Chairman Jerome Powell said the tapering was a “recalibration” for the central bank and did not commit to making similar moves at every future meeting.

“Probably two or three interest rate cuts, 25 basis point cuts, they have to do, or they lose credibility,” Tepper said. “They want to do something besides 50. You know, another 25, 25, 25 looks like it’s going to have to be done.” (1 basis point equals 0.01%)

“I don’t love US markets”

Still, Tepper said the macro setup for U.S. stocks makes him nervous as the Fed eases monetary policy in a relatively strong economy as it did in the 1990s. Last week’s significant rate cut came despite that most economic indicators looked quite solid.

“It was around the ’90s in that market where the Fed cut rates in Y2K in a good economy,” he said. “Rich in ’97….richer after long term credit, and the ’99 early 2000 bubble mania, so I don’t like that. I’m a value guy.”

Gross domestic product has grown steadily, and the Atlanta Fed is targeting 3% growth in the third quarter on the strength of consumer spending. Meanwhile, most tools showed inflation still well ahead of the Fed’s 2 percent target. However, there has been a slowdown in the labor market, which has partially driven the outsized rate cut.

“It sure as hell won’t be short”

The widely watched hedge fund manager said that while the central bank’s move gave him hesitation, he was certainly not betting against U.S. stocks because of the immediate benefits of easy policy.

“I don’t love the U.S. markets from a value standpoint, but I’m sure it won’t be short because I would be so nervous about the easy money setup everywhere, a relatively good economy,” Tepper said. “It would make me nervous not to be somewhat long in the US”

Tepper, who also owns the National Football League’s Carolina Panthers, revealed he is going all-in with China amid a rate cut and a wave of support measures the government recently announced to shore up a economy in decline.

He added that he prefers Asian and European stocks over US stocks.