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Why the Fed may not even raise rates next year

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With Wall Street doubting the Fed's willingness to hike interest rates this year, Deutsche Bank's chief U.S. economist said he does not have a lot of confidence the Fed will even raise the fed funds rate next year.

Deutsche economist Joseph LaVorgna's forecast is that the Fed will raise rates in March for the first time in more than nine years, and then follow up with another hike in June. He expects it would then pause while it assesses the impact of its hiking.

But in a note Monday he pointed out that the Fed could delay: "...[W]e do not have much confidence in rate hikes next year given that the Fed had ample opportunity to raise rates earlier this year when the economy and labor market were much stronger, but did not do so," wrote LaVorgna.

Fed Chair Janet Yellen has said she would like to raise rates this year, but the Fed surprised some by passing on a rate hike in September. That means the final opportunities to hike this year will either be at the meeting next week, or the December meeting, seen as a more likely time by a number of economists.

Barclays also expects a March hike, but Goldman Sachs, Bank of America Merrill Lynch and J.P. Morgan all are forecasting a December hike.

LaVorgna said the extent of the global slowdown and its potential impact on the U.S. is unclear so that may make the Fed put off a hike, but he also said politics could intervene.

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"I do believe that the Fed will be part of the discussion next year if they haven't raised rates," he said. If there is no rate hike by June and unless the economy is overheating, he said the Fed may hold off to stay out of the political firing line ahead of the November election.

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An unusually public rift between the Fed chair and two governors is adding to an already confused policy message that has been hurting the central bank's credibility with markets.

The split in views inside the Fed became very apparent last week when two Fed governors, Daniel Tarullo and Lael Brainard, each spoke against raising rates this year because of concerns about the economy. Yellen and New York Fed President William Dudley have said they would like to raise rates this year, depending on the economic data. Dudley repeated that comment last week, but also said the economic data have deteriorated.

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