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Beyond the first hike: Fed's pace is big unknown

Investors are clearly obsessed with the question of when the Federal Reserve will first raise rates. Yet it's the pace of future increases that could ultimately be more important for risk assets.

Fed presidents James Bullard and Jeffrey Lacker made headlines this week when they told reporters that the any rate hikes after the first one will not necessarily be gradual, and will not be on a predetermined path.

To be fair, they are among the most hawkish members of the Federal Open Markets Committee. Lacker's was the the lone dissent to the Fed's decision not to raise rates in September, and Bullard has said that he would have dissented had he had a vote, which he will in 2016.

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Still, the idea that subsequent rate target increases will be gradual no matter when the Fed hikes has become a key part of market speculation. Fed chair Janet Yellen frequently directs attention away from hike number one to the slow hikes beyond it.

Meanwhile, Bullard's and Lacker's comments served to remind investors that if the Fed's actions are truly data-dependent, such vows can really only serve as a forecast.

If inflation finally picks up, as the Fed's hawks expect it will, the central bank would obviously be hard-pressed to increase rates rapidly in order to fulfill its mandate to maintain stable prices — particularly since the "maximum employment" side of its mandate appears to be well-met with job creation on the rise.

But that doesn't prevent the doves from suggesting a promise-heavy policy path.

"It is critically important to me that when we first raise rates the FOMC also strongly and effectively communicates its plan for a gradual path for future rate increases," Chicago Fed president Charlie Evans said in a Thursday speech.

He explained that if the committee failed to provide such guidance, it would be an "important policy error" because it might induce people to believe the Fed "is less inclined to provide the degree of accommodation that I think is appropriate for the timely achievement of our dual mandate objectives."

Whether or not such a belief would be justified is a separate question entirely.

'Data dependent in both directions'

For University of Michigan economist Miles Kimball, the fact that hawks and doves have become divided on the question of data dependency — with the former swearing their allegiance to the data, and the latter emphasizing the psychology of market participants — is unfortunate.

"You do want to be data-dependant, but you want to be data-dependant in both directions," Kimball said in a Friday interview with CNBC. "No one is mentioning the possibility that if the economy ends up doing worse, that the Fed can reverse course."

In other words, the Fed has the flexibility to cut rates after it has raised them (or in a reverse situation, raise after it has cut them). That would be in stark contrast to the "path" model currently in force, under which the first rate hike begins a one-way path to further hikes, with the only real question being the pace of such hikes.

"The nature of news is that news is bad about as often as it is good. If you're really and truly data-dependant, it shouldn't be a shocking thing if you make your target rate go up by a quarter point and then at the next meeting, if bad news comes, cut it back down," Kimball said. "We'd have better policy if we made interest rates more sensitive to data."

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Needless to say, not every economist agrees.

"They don't want to be seen as a stop-and-go policy shop," said Robert Murphy of Boston College. "And there is a view that it's not the movement in the rate today that really matters; it's the long-term path for where we see rates going."

The federal funds rate may not be a fine enough tool such that responding to minor changes in the economy would be reasonable, Murphy said.

Still, the Fed will either be data-dependent or it will not be. And if it is, any promises about the long-term path of interest rates may ring a bit hollow — particularly given how inaccurate the Fed's economic forecasts have proven to be.

—By CNBC's Alex Rosenberg.

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