It is increasingly becoming clearer that Federal Reserve will temper with its interest rate adjustment plans. Low inflation levels, economic slowdown in China and weakness in the domestic labor market could convince Fed officials to hold off further rate hikes. Fed indicated plans to raise interest rates four times this year. Another meeting for Fed officials this year has been planned for March 15-16. The officials last met at their headquarters in Washington in the latter days of January.
The U.S. unemployment figures have been up and down in recent weeks. There appears to be no clear pointer about what to expect on that front. Given the high level of uncertainty in the job market and other sectors of the economy, Fed officials aren’t sure what to do about interest rates. Minutes of the January meeting of Fed officials were recently released and they show a dividend house. Some are of the opinion that things will get better, but others believe that raising rates could complicate situation an already seemingly fluid economic situation.
Global economic slowdown
Economic data from China aren’t encouraging and the problem is spreading to more countries. A slowdown in the global economic means a weak export market for the U.S., and that is one of the problems Fed officials are juggling.
Fed targets inflation to rise 2%, but that target has been missed in more than three years and it appears 2016 won’t be any better. The central bank also planned to raise interest rates four times this year after doing so in December 2015. However, the prevailing conditions and data point don’t appear to support a bullish economic sentiment. That means that raising rates quickly could further drag economic growth slower. With that, some Fed officials are already calling for reduction of inflation target and withholding of further rate hikes until it becomes clear that the economy is improving.
What traders predict
Most futures traders are already sold on the thought that Fed will cool planned rate hikes. The Chicago Mercantile Exchange says that 94% of traders predict Fed won’t hike rates at the March meeting. About 83% of traders are of the view that rate hikes will be pushed back until at least midyear. But 50% of traders believe Fed will not implement rate hikes in 2016.
What analysts say
Some analysts such as Peter Hooper of Deutsche Bank Securities also see strong indications about pausing interest rate hikes. Hooper now expects Fed to raise rates only once in 2016 compared to thrice that he had originally predicted for the year.