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Global fears prevent US Fed from rate hike plan

January 21
4:06 AM 2016

The volatility across the global markets is keeping pressure on the US Federal Reserve to go slow on raising interest rates. Analysts forecast four more rate hikes in 2016, but not so fast. The global economic slowdown and lower oil prices are upsetting the Wall Street.

The US Federal Reserve is scheduled for a meeting next week. The US Fed raised interest rate in December 2015 for the first time in a decade. The Fed increased interest rate by 0.25 percent from the near zero level. The Wall Street expects that there would be only two more hikes in 2016. 

CNN Money reports that all the three major US indices fell over 10 percent this year so far. Dow Jones fell five times dropping 250 points each session during the past 10 trading days. S&P 500 is also fell eight percent in two weeks and Nasdaq tumbled 10 percent. 

However, slump in commodities market, slowdown in Chinese economy and lower oil prices are impacting stock markets including the Wall Street. These conditions tone down the prospects for interest rate hike immediately after the December 2015 increase. 

Latest poll by Reuters reports that the US economy to grow at 2.5 percent in 2016 marginally lower than previous prediction of 2.8 percent. US Federal Reserve may raise interest rate for three times this year as there's subdued outlook for the US economy and global markets as well. The US economy is poised to support the weak global markets as the world's largest economy is witnessing positive aspects such as low unemployment rate and surge in private hiring. 

No one is expecting another round of hike in the forthcoming meeting of the US Federal Reserve next week. However, there's possibility of raising interest rate in the meeting scheduled in March, some economists predict. 

Ed Yardeni, chief investment strategist at Yardeni Research, said: "We doubt that the Fed will be hiking the federal funds rate four times this year. Yardeni is expecting only one rate hike this year. The US Federal Reserve gives utmost priority to the stock markets to ensure that they impact the economy in a more positive way.

Some analysts hold view that US Federal Reserve committed a mistake by increasing interest rate in December 2015. The drop in equities wiped out trillions of dollars in form of eroding market capitalization, as reported by Zero Hedge. JPMorgan lowered its GDP forecast for the fourth quarter of 2015 from one percent to 0.1 percent. 

In general, the rate increase by the US Federal Reserve is considered to be a signal that US economy is doing well. Where there's drop in interest rate or revision, it means that US Federal Reserve is not much confident about the state of economy. Going by the Wall Street crash in August 2015, the US Fed didn't raise interest rate in September meeting. 

The US Fed Chair Janet Yellen and her team look beyond short-term volatility and ignore sometimes. Oil price is hovering at $28 per dollar indicating lowest in 12 years. The drop in oil prices is keeping inflation. The Fed wants inflation at two percent. The real inflation rate for November 2015 was 0.5 percent and it was highest in that year. 

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