The Fed is partying like it's 1998—and raising risks: Citi strategist

The Federal Reserve's dovish stance on interest rates is increasing the risks of financial fallout from a rate hike in the future, Steven Wieting, Citi Private Bank's chief global investment strategist, said Wednesday.

Fed policymakers indicated in March they would raise rates fewer times than they previously planned, citing financial conditions in overseas markets among other things. The Federal Open Market Committee will deliver a decision on rates when it concludes a two-day meeting later Wednesday.

Wieting said the Fed is more focused on international developments than at any time since 1998, when it cut interest rates to prevent U.S. economic growth from stalling amid the Asian financial crisis. He said the U.S. central bank has drawn a direct line between rate policy and Chinese currency risk.

"There's never a good time to set off certain triggers," Wieting told CNBC's "Squawk Box."

"If you run monetary policy with these sorts of issues in mind, the problem is delayed, and it can actually become bigger. You take a look at 1998, and then where were we in 2001 and 2002?" he said, referring to the dot-com bust and corresponding stock market crash.

Wieting said history is not necessarily repeating itself, and it's too soon to tell whether the Fed's initial quarter of a percent hike in December — it's first in nearly a decade — was a mistake.

Aneta Markowska, chief U.S. economist at Societe Generale, said it is difficult to say whether the Fed missed its chance to raise rates because it's uncertain what would have happened to the dollar had policymakers hiked more aggressively.

"The dollar has done a considerable amount of heavy lifting for them," she told "Squawk Box" on Wednesday. "Twenty percent appreciation is equivalent to roughly six hikes, so for all intents and purposes, the cumulative tightening through financial conditions has been quite, quite considerable."

While the greenback has eased back to October levels, the foundation of that decline is built on a dovish rate outlook, she said. At the end of last year, the market was expecting three rate hikes in 2016, but investors now see the first full increase in March 2017, Markowska added.

Further, the U.S. has averaged 2 percent growth and reduced labor capacity throughout the current cycle, she said.

"What does that tell you about potential growth? It tells you potential growth has expanded at less than 1 percent in the past five years. That's the real story," Markowska said.

If the potential pace is that low, then the real rate of growth is much lower than what the Fed assumes the United States will return to, she said.

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