Fed May Hold Rate Hike to Ease the Market

January 15
4:58 PM 2016

Continuous plunge in oil price has affected stock market and also has implication on U.S. monetary policy as well. Fed may hold the plan to increase interest rate to ease the market.

Strengthened dollar and nationwide economic growth has encouraged Fed to increase the rate last December, and gradual increases may follow in 2016. However, global economy slowdown may impede the next forecasted four times rate hikes in 2016. A continuous plunge in oil price has affected the stock market and creating a slowdown in stock market growth.

St. Louis Fed President James Bullard said that recent movement in oil prices has been very substantial. He said in a speech on Thursday as reported by CNBC, "Once oil prices stabilize, headline inflation should return to the Federal Open Market Committee's inflation target of 2 percent, although it may take longer than previously thought."

The Federal Open Market Committee is scheduled to meet next on January 26-27.

U.S. crude have fallen to 17% this year, and this week briefly touched below $30 per barrel. Mr. Bullard said that low oil prices are net positive for the economy, and it could take longer than expected to stabilize. James Bullard is one of the voting member of the central bank's policymaking committee

Previously, other voting officials have spoken regarding the plan to raise interest rate even more. Stanley Fischer, Fed Vice Chairman on Tuesday commented the U.S. unemployment rate, which according to him, is nearing its natural rate and that the central bank is still conducting expansionary monetary policy. San Francisco Fed President John Williams also said that officials could raise borrowing costs more or less than four times this year.

Other the voting officials suggested to ease down the interest rate to ease the market: Boston Fed President, Eric Rosengren and Chicago Fed President, Charles Evans. Eric Rosengren said U.S. and global economic growth may be diverging to a slower growth, and that would force the Fed to a more gradual pace of normalization. While Chicago Fed chief Charles Evans, who is known as one of the dovish policy maker as Rosenberg also suggested to slow the interest rate hike.

Charles Evans told Reuters on Wednesday that slowdown in China's stock market, weak oil prices and other factors are the important factor to look up. In regard to those factors he said, "It's something that's got to make you nervous."

Meanwhile, Adam Posen, President of Peterson Institute for International Economics told Bloomberg Television on Tuesday that Federal Reserve will raise interest more than investors are pricing in. As quoted by Bloomberg the former Bank of England policy maker said, "I think the market is under-pricing the likelihood of both a March rise and the number of rises in the year to come."

Poor performance of world economy may bring another slowdown in global market for 2016. The Fed's plan to increase rate may have to wait, in order to ease the market.

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