In a classic 1899 poem by Stephen Crane, a man insists to the universe that he exists, only to hear the universe reply: "The fact has not created in me / a sense of obligation." As the Federal Reserve looks to adapt to changing economic conditions by removing stimulative policies, the conversation between chair Janet Yellen and investors could sound somewhat similar.
"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," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank, on Tuesday's "Futures Now. "
The Fed is currently using an ultralow target on the federal funds rate to keep short-term interest rates low. But as economic conditions change, the Fed has said they will raise rates.
"The great economist Wayne Gretsky said you have to skate to where you think the puck is going, not where it is, and the problem the Fed has is that by its own forecasts, you're going to have real interest rates that are still sharply negative next with an economy already at full employment and inflation at target, and yet somehow bond investors think rates are going to stay where they are," LaVorgna said. "So the problem is, if you wait till the last minute, which is what this Fed wants to do, you do really risk financial issues, and the fact that you may ultimately destabilize the economy because you have to raise rates significantly more than you thought. That's the problem."
And with the Fed watching data carefully, it could move more quickly than the Fed anticipates.
"Historically what's happened is the data change abruptly, more abruptly—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 port for Q3—and then all of a sudden, the Fed rhetoric shifts, and then the market reacts very quickly and violently," he said.
But LaVorgna adds that once the violence hits, it might be time to buy.
Although a rate hike will likely cause a correction, it's "actually going to 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. 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," he said.