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Markets watching Yellen at Jackson Hole for hike hints but Rabobank says admitting the Fed won't hike poses shocking risks

The Federal Reserve has spent months pushing back expectations for its next interest rate increase, but it risked "shocking" consequences if it admitted outright that a hike wasn't coming this year, an analyst said.

Michael Every, head of financial markets research for Asia Pacific at Rabobank, told CNBC's "Squawk Box" that the consequences of telling the market that hikes were off the table this year would be "quite shocking."

While the initial reaction would be a weaker dollar and significant rally in most risk assets, the Fed would be boxing itself in longer term, he said.

"It effectively would be locked into a paradigm where we can't ever really raise rates," he said.

The Fed last increased interest rates in December, its first hike since 2006. That raised the Fed's target rate to a range of 0.25 to 0.5 percent. Since then the Fed has pushed back expectations for both the timing and the quantity of its rate hikes as the global economy has faced fresh risks, including emerging market turmoil and the Brexit vote.

Now, Every said, to admit that hikes were off the table for 2016 would effectively be an admission that monetary policy had become ineffective.

"We know what underlying problems we have in the global economy: Far too much of it is ice-cold, pockets of it are red hot. And we effectively would be saying monetary policy can't do anything to make the colder parts warmer and it's not prepared to do anything to make the hotter parts colder," Every said. "That's going to make it extremely unstable."

Every expected such an admission would spur some markets into "absolutely overheating and probably ending very messily as a result."

He noted that the market expected the Fed would likely hike rates again this year, even though the Fed futures indicated that only a 50 percent chance was priced in currently.

He said the market would watch Jackson Hole, the Fed's symposium in Wyoming that starts on Thursday, for cues on the next rate hike.

"If we do get further certainly on that front, even if it means it's not going to happen until December, it could mean we get a pickup in the dollar this week," he said.

The annual Fed symposium has sometimes been used by Fed chairs to make important policy pronouncements. Fed chief Janet Yellen's speech in Jackson Hole on Friday has been anticipated for weeks, especially after Fed speakers over the past several days suggested the Fed could raise rates as early as September.

But the Fed speakers have also spurred confusion. Last week, San Francisco Fed President John Williams said in a letter that the Fed should consider raising its inflation target to 3 percent and allow interest rates to be lower for longer. New York Fed President William Dudley then said in a television interview that the market was too complacent and the Fed could raise rates as early as September. Then Williams spoke again, suggesting the Fed could move soon to hike rates.

Patti Domm contributed to this report.

Janet Yellen chair of the U.S. Federal Reserve
Alex Wong | Getty Images
Janet Yellen chair of the U.S. Federal Reserve


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—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1