Tags: LaVorgna | Fed | rate | investors

Deutsche Bank's LaVorgna: Fed Might Shift Rate Stance Quickly, Jarring Investors

By Dan Weil   |   Wednesday, 13 Aug 2014 10:45 AM

While top Federal Reserve officials have indicated that interest-rate hikes likely won't begin until at least early 2015, a spate of strong economic data could shift the Fed's stance, says Joseph LaVorgna, chief U.S. economist at Deutsche Bank.

And investors may be the loser.

"If the numbers change and the Fed rhetoric all of a sudden changes, they're not going to care whether investors feel like the rug got pulled out from underneath them," he told CNBC.

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The central bank has kept its federal funds rate target at a record low of zero to 0.25 percent since December 2008.

"Historically what's happened is the data change abruptly," LaVorgna noted.

"It might just be that a couple more inflation reports surprise to the upside, or a gangbuster employment report. It may be a really good GDP report for Q3. And then all of a sudden, the Fed rhetoric shifts, and then the market reacts very quickly and violently."

A rate hike will actually "be a good sign. It will mean that the economy's on firmer footing, that you'll get inflows that have blown into bonds, into stocks," he explained.

"It'll be a great buying opportunity for risk assets, and it'll actually probably help the data, because companies will wind up doing less financial engineering, and they'll be investing more in cap-ex and in people, once the Fed gets out of the way and out of the market."

Meanwhile, Harvard economist Martin Feldstein and Council of Foreign Relations co-chairman Robert Rubin argue that the Fed's "macroprudential" policy — i.e., regulatory powers — may not be sufficient to prevent another financial crisis.

They noted three potential problems in a Wall Street Journal opinion piece.

"First, since a wide range of assets and asset holders are involved, current tools are not nearly as broad and comprehensive as the existing range of systemic risks. Second, the situations are complex, making the design of an appropriate regime complicated and time consuming," they wrote.

"Third, it might take considerable time for the FSOC and the relevant agencies to reach a decision to act." The Financial Stability Oversight Council was established as part of the Dodd-Frank financial reform law. It can give the Fed authority over certain non-banks and can recommend policy changes to regulators.

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