The Silicon Valley Bank crisis will force the Fed to slash rates by 100 basis points to prevent contagion, market guru says

• The Silicon Valley Bank crisis may force the Fed to slash rates this year, Larry McDonald said.
• The market guru told CNBC on Friday he expects 100 basis points of easing by December.
• "In essence, the Fed is causing this bank run," he said, referring to earlier steep rate hikes.

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The Silicon Valley Bank meltdown may incite the Federal Reserve to cut rates by 100 basis points by December to prevent contagion in the financial system, Larry McDonald said.

That would mark a sharp reversal from the central bank's current course of aggressive tightening to rein in inflation.

Rate hikes totaling 450 basis points over the past year have made returns on short-term Treasurys more attractive, draining deposits from banks like SVB, the founder of "The Bear Traps Report" told CNBC on Friday.

"In essence, the Fed is causing this bank run," he said.

Shares of Silicon Valley Bank crashed another 68% on Friday, extending its two-day dive to as much as 87%, with several venture capital firms advising their portfolio companies to pull money from the bank.

Meanwhile, shares of Wall Street banking giants are falling, and regional lenders like First Republic, Signature Bank and PacWest are also plunging.

"Within the next couple of months, as the contagion brews up this channel — up to high yield, leveraged loans, across the entire ecosystem — that's when the Feds gonna have to bring out the other firehose and cut rates, probably within six to nine months," McDonald said.

The SVB Financial Group's crisis began after it announced a $1.8 billion loss from the sale of its $21 billion bond portfolio, which was hit by the Fed's rate hikes. After failing to raise more capital, SVB is reportedly looking to sell itself.

While bigger banks may have the staff and expertise to manage interest rate risks, McDonald said, regional banks like SVB are unaccustomed to this sort of rate environment. 

And the Fed is expected to continue raising rates later this month. Earlier this week, Fed Chairman Jerome Powell opened the door to bigger increases as economic data point to sticky inflation.