×

Why the Fed may revise down pace of 2016 rate hikes

Current labor market conditions put the Federal Reserve on pace for a December interest rate hike, but other economic indicators suggest future increases may come more slowly than anticipated, Deutsche Bank Securities' chief economist said Wednesday.

"This is going to be very gradual increase, and certainly the data we've had more recently have suggested that, if anything, they'll be revising down a bit their expectations for rate increases for next year," Peter Hooper told CNBC's "Squawk Box."

Data from the Institute for Supply Management on Tuesday showed the U.S. manufacturing sector contracted in November, falling to its lowest levels since June 2009, when the economy was mired in the recession.

Hooper said a weak manufacturing sector, along with U.S. dollar strength and low oil prices, suggest the Fed can increase rates slowly next year. He told CNBC he is also looking for signs that businesses will ramp up capital spending, noting that low capital expenditures have been at the core of "dismal" productivity.

The Fed is now widely expected to raise interest rates for the first time in more than nine years at its December meeting. Central bankers have held U.S. benchmark fed funds rates at near zero percent since December 2008.

In the absence of productivity gains, employers may have to hire more workers, so the unemployment rate could fall faster than the Fed expects, Hooper said. That would introduce some pressure to hike rates despite a relatively sluggish economy, he said.

JPMorgan Chase Chief Economist Bruce Kasman said he believes the potential growth rate for the U.S. economy is 1.5 percent and that the economy cannot grow more than that 1.5 percent without a continued tightening of labor markets.

"Labor markets are starting to get tight and we're sitting here with zero-policy rates," he told "Squawk Box."

"I think the the surprise for the Fed next year is going to be the dynamics of the unemployment rate moving down to 4.5 percent, maybe lower."

David Zervos, chief market strategist at Jefferies, said the European Central Bank monetary policy meeting on Thursday will have implications for the Fed's rate hike pace next year.

Most in the market expect the central bank to increase its asset purchase program and lower its deposit rate, the rate at which banks park excess funds with it.

"They're going to much more negative rates, and I really don't think any of us are prepared for what it means to have a negative 40 or 50 ... basis-point deposit rate in a major currency," he told "Squawk Box."

The dollar is likely to strengthen as U.S. and European monetary policy diverge, alleviating pressure on the Federal Reserve to raise rates much, he said.

"I think the dollar does the heavy lifting, rates don't, and that's probably net a positive for the equity market, [and] also removes some uncertainty," Zervos said.

—Reuters contributed to this story. CNBC's Klaire Odumody contributed reporting.