Communication gap between Fed and the market: JPMorgan Economist

For the economy, will it matter if there is an interest rate increase?

The Federal Reserve minutes released Wednesday should theoretically give investors more clarity on when the next rate hike is coming. But the central bank and the market are having communication issues, according to Michael Feroli, chief U.S. economist at JPMorgan.

"We're working our way towards an agreement between the market and the Fed," Feroli told CNBC's "Squawk on the Street" on Friday. "Sometimes the Fed has to hit the market over the head with where they're going in the next meeting."

Messages from the central bank's chair, Janet Yellen, in the past few months have been more dovish than what we heard in the minutes from the Fed's April policy meeting, Feroli said.

"The emphasis on the communication recently, even if the market hasn't heard it, has been data dependence," he said.

Krishna Memani, chief investment officer of Oppenheimer Funds, echoed Jeffrey Gundlach's sentiment that the Fed has changed its tone. Gundlach, CEO of DoubleLine Capital, said Thursday that the central bank has moved away from needing an improving data pattern to raise rates. Now, it is looking to raise rates unless the pattern weakens, he said.

"If you had listened to Janet Yellen in March, that certainly wasn't what she was saying," Memani told "Squawk on the Street" on Friday. "So while they can blame the markets for not getting it, they are to blame for the markets not to get it."

Reserve Bank of Australia
BTIM warns Reserve Bank of Australia may adopt negative interest rates on weak inflation
Federal Reserve Chair Janet Yellen.
The case for a July interest rate hike

The market is still not incorporating a 100 percent rate hike probability, Memani said. He pointed to upcoming events like a British vote to leave the European Union in June that could influence the Fed's decision.

The gap between the U.S. central bank and the market right now isn't huge, Feroli said. But it's likely to get bigger heading into next year. Long term, Feroli predicted that the two are likely to end up at "totally opposite ends."

"When you get out to 2017 and 2018, the differences become really enormous because the Fed the year beyond is looking for four hikes," he said. "The market has nowhere near that right now."

Federal Reserve Board Chairwoman Janet Yellen.
The Fed may surprise markets in June: Strategists

But if the market does fall apart in the second half of the year because of one rate rise, then the Fed will likely hold back next year, he said. If we do get a rate hike this summer, Feroli said it's not likely to send ripples through the economy.

"Obviously it will strengthen the dollar somewhat, and we've seen that over the past few days and weeks but I don't think it's going to be a major factor," he said.

If we have sustained rate hikes, risk-off, risk-on sentiment is likely to change, according to Memani.

"I think risk-off comes back in vogue because the dollar would appreciate meaningfully in that context," he said. A 10 percent drawdown in the market, in that setting, is not out of question, Memani said.