Research Team at Goldman Sachs, suggests that the Fed officials continue to signal rate increases for later this year, but financial markets are increasingly focused on the risk of a policy reversal. Key Quotes “Market pricing implies only about a 50% chance of a rate hike in 2016, and a 30% chance of a cut. Even considering downside risk scenarios, markets may be overestimating the chances that the Fed reverses course. Policy reversals—lowering rates shortly after an increase, or raising rates shortly after a cut—are surprisingly uncommon in the data. Across G10 economies since 1990, we find only five policy reversals in 85 cycles—the other 94% of the time policy trends continue for at least a half year. Academic research suggests two reasons for the infrequency of policy reversals in the data. First, central bankers may be averse to changing course for communication- and credibility-related reasons. Second, the tendency toward gradualism—changing policy incrementally in response to incoming data— creates optionality, and helps avoid reversals. Outside of a recession scenario, the hurdle for Fed rate cuts any time soon is quite high, in our view. However, a reduction in the “dots” at the March FOMC meeting would be a natural response to recent market developments.” For more information, read our latest forex news.