To raise interest rates, the Fed needs Europe's permission
The Federal Reserve may begin raising interest rates this summer, but it won't get very far with the deflationary policies from the central banks in Europe, according to one analyst.
The market is sending signals that the Federal Reserve may not make much headway raising interest rates during the next two years—even if central bankers are intent on doing so, Jonathan Golub, chief U.S. market strategist at RBC Capital Markets, said on Tuesday.
The Fed will not be able to raise its federal funds rate above 1.5 percent by the end of 2017, Golub said. If it tries to do so, the dollar will start to rise, putting pressure on the economy and causing the central bank to retreat.
"I would love to see the Fed be able to move toward 2 percent, but with free money in Europe, it's very hard for them to get tighter," he told CNBC's "Squawk Box." "Are we asking the permission of the Europeans for our central bank policies? I'm not sure, but the market's saying [we are]."
The Fed faces the challenge of raising rates at a time when European central bankers are suppressing rates by purchasing large amounts of bonds. That monetary policy disparity is expected to send investors flocking to U.S. bonds for higher yields, which would drive up the value of the dollar.
The greenback has already run up too far, too fast, Golub said, and while he believes the United States remains strong compared with other economies, no country can weather a 20 percent move in its currency in eight months without experiencing disruptions.
That said, Golub views the lower-for-longer rate policy as bullish for stocks. With investors looking for returns outside the bond market, he sees U.S. equities, excluding the energy sector, returning 12 to 14 percent in 2015.
"If you look at the average year that you don't have a recession, the market's up 18 percent," he said. "As long as recessionary risk is away, there's no reason you won't get double-digit price returns on the market. People are way too bearish."
Mark Grant, managing director at Southwest Securities, said it would be a "huge mistake" for the Fed to raise interest rates, noting that $5 trillion of bonds around the world have negative interest rates and more than 20 central banks have lowered rates in the last six months.
The dollar has been "ravaged" by the European Central Bank's stimulus program, he added.
"For us to raise interest rates in this kind of environment would just be really the wrong, wrong thing," he said.
While the U.S. unemployment rate stands at 5.5 percent and companies are beginning to raise wages, Europe is essentially exporting deflation, Grant said. Lower oil prices are adding to the deflationary pressures, he said.
The impact of the crude rout on energy sector returns and the stronger dollar should converge to create disappointing first-quarter earnings, he said.
With the 10-year Treasury up 2.5 percent, individual investors should look very carefully at big, liquid bond funds that can potentially return 8 to 9 percent and provide security, Grant said.