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Study Shows Fed is Unlikely to Reverse Course

federal-reserveWhile recent economic slowdowns in the United States combined with uncertainty global markets, many have predicted a slower pace of rate increases by the U.S. Federal Reserve than originally anticipated.

Among those that have downgraded their forecast is Fannie Mae, which originally predicted four rate hikes from the Fed in 2016 but is now predicting only three, according to the GSEs’ economic outlook for February released last week. The Federal Open Market Committee, the policymaking body of the Fed, has already met once since December’s historic liftoff without raising the rates again, and the recent economic weaknesses have many wondering if the Fed will not only not raise the rates in the March FOMC meeting but if the central bank will lower the rates.

Despite the recent economic slowdowns, however, it is unlikely that the Fed will reverse its course and begin lowering the rates, according to recent study by researchers at Oxford Economics examining central banks from around the world and their policy decisions over the last 30 years, CNBC reported on Monday.

The 20 central banks worldwide examined in the Oxford Economics shift showed that in the 1980s, policy rate reversals within six months of previous rate hikes accounted for 20 percent of rate decisions. For the 1990s, that share dropped to 13 percent, and from 2000 to 2015, the percentage fell even lower to just 7 percent. In the United States, 30 percent of rate decisions by the Fed in the 1980s were rate reversals within six months of a previous rate hike. The number fell drastically to 3 percent in the 1990s, and there have not been any short-term reversals by the Fed since the year 2000.

The authors of the Oxford analysis noted that most central banks, especially the Fed in the U.S., are paying less attention to short-term changes in the money supply than they did 30 years ago when short-term reversals were more frequent.

“Central banks may also have got better at their job, reducing the 'policy error'-type reversals,” the authors wrote. “The general drop in worldwide inflation since the 1980s has also meant less volatility in inflation and interest rates.”

Fed Chair Janet Yellen said in her testimony before Congress last month that there is “always a risk of recession” and that occurrences that occurred in global markets could slow down the U.S. economy. She cautioned about being careful not to “jump to a premature conclusion” about what the economy in the U.S. is going to do, saying “I don’t think it is going to be necessary to cut rates.”

About Author: Brian Honea

Brian Honea's writing and editing career spans nearly two decades across many forms of media. He served as sports editor for two suburban newspaper chains in the DFW area and has freelanced for such publications as the Yahoo! Contributor Network, Dallas Home Improvement magazine, and the Dallas Morning News. He has written four non-fiction sports books, the latest of which, The Life of Coach Chuck Curtis, was published by the TCU Press in December 2014. A lifelong Texan, Brian received his master's degree from Amberton University in Garland.

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