Here’s the reason so much big money is on sidelines, says economist Diane Swonk

Key Points
  • Veteran economist Diane Swonk is predicting the Federal Reserve could soon face a new dilemma.
  • It comes as the Fed gets ready to issue its decision on interest rates next week.
Diane Swonk on economic uncertainty

As stocks come off their worst week in a year, one veteran economist is predicting the Federal Reserve could soon face a new dilemma. It comes as the Fed gets ready to issue its decision on interest rates next week.

Recently, longtime market watcher Diane Swonk told CNBC it'll likely be linked to a wave of disruptive activity from the Beltway, and it could hurt the economy — one that's finally chugging along.

Economic growth "doesn't need the support it once did, hence the Fed is lifting its foot off the accelerator and raising rates. However, what is worrisome is how much will uncertainty will play into the summer," said the CEO of DS Economics on Friday's "Trading Nation. "

She added: "Strong is never what this economy has been, but I would describe it as close to its potential, if not above it."

'Not what we wanted to see'

Swonk is part of the Wall Street consensus, predicting the Fed will raise its short -term interest rate target by a quarter point on Wednesday. It would be the third rate hike since December, and its fourth since the 2008 financial crisis. The latest move would put rates just above one percent.

However, it could end up being the last hike for a while. Swonk predicted a September hike is likely off the table, voicing concern that Washington politics could rattle policy and sidetrack the economic recovery.

Despite pressure from the White House, top House Republicans haven't committed to a no-strings-attached vote on raising the nation's borrowing limit before Congress adjourns in August. This week, House Speaker Paul Ryan vowed only that lawmakers would raise the debt ceiling before the country actually hits it — an event that could plunge financial markets into turmoil and rattle the vast market for U.S. Treasurys, long considered one of the safest investments in the world.

"Many people are talking about another showdown over the debt ceiling. We've been down this road before. But we don't seem to learn our lessons very well," she said.

Swonk added that President Donald Trump's business-friendly policies are less likely to be passed this year, falling short of market expectations for an immediate economic boost.

"The optimism guiding everything from tax reform, infrastructure spending, deregulation — that at least has all been moved out if not sidelined. It's hard to think that all of this would be done by the August recess by Congress," noted Swonk.

"I have a lot of clients, big multi-national clients, who have a lot of money on the sidelines," she added. "They were ready to go in January and because of uncertainty related to fiscal policy, they are now sort of deer in the headlights and on hold. That is not what we want to see."

Economist Diane Swonk on the Fed and politics

--CNBC's Ylan Mui contributed to this article.