Stock swoon may push Fed to delay more rate hikes

Expectations that the Federal Reserve would raise interest rates several times this year are fading along with the stock market, highlighting the growing consensus among investors and economists that U.S. will struggle to grow in 2016.

The market is now pricing in a single rate hike by the Fed this year. That represents a significant dialing back of expectations in December, when the Federal Open Market Committee -- the Fed's rate-setting panel -- increased its target rate by a quarter point, the first such move since 2006.

"The market view certainly has changed, with the chances of a first hike for the year coming in September at only 60 percent," Jack Ablin, chief investment officer at BMO Private Bank, said. "Market participants are clearly discounting a retrenchment to this tightening policy" that at the end of 2015 assumed four hikes this year.

"It's going to be extremely difficult for the Fed to hike rates much more in 2016, and there is some talk they may go back to QE," said Nick Raich, CEO at the Earnings Scout, referring to the Fed's bond-buying program known as quantitative easing. "The Fed probably shouldn't have been hiking rates into decelerating earnings."

Since the Fed made its late 2015 move, the S&P 500 (SPX) has plummeted about 12 percent, reflecting the Fed's tightening and the view that the global economy is slowing more rapidly than many had anticipated.

While Wall Street's ride has been erratic, a majority of Americans, or 56 percent, don't see a reason for alarm about an increase in rates, according to a Bankrate.com survey released this week.

"The impact of rising interest rates will take some time to show a cumulative effect," Greg McBride, chief financial analyst at Bankrate.com, said in a statement. "Now is the time for consumers to insulate themselves from rising rates, such as refinancing from an adjustable-rate to fixed-rate mortgage and snagging zero-percent balance transfer credit cards."

The Fed's decision to increase its key federal funds rate to 0.25 percent -- up from at or near zero percent -- changes what banks charge each other for overnight loans. Because banks and other lenders use the Fed benchmark to determine the rate on loans from mortgages to credit cards, consumers will see a difference, albeit a small one.

Shortly after the Fed's rate decision, major banks including Bank of America, Wells Fargo, JPMorgan Chase and U.S. Bancorp announced hikes in their prime lending rates, from 3.25 percent to 3.50 percent.

Economic reports on Wednesday included an unexpected decline in U.S. consumer prices in December, further evidence of weak inflation that reduced chances of a Fed rate hike in March. The data, taken with soft reports on retail sales and manufacturing, signal slowing economic growth at the end of 2015.

Minutes from the U.S. central bank's December meeting showed members to be primarily concerned about the outlook for inflation, which has remained stubbornly low, with the Fed blaming "transitory" factors including the U.S. dollar's rise and low energy costs.

Slowing economic activity, waning corporate revenues and falling commodity prices all add up to "global growth is slowing a little faster than initially thought," Raich said. "Growth is going to be persistently weak, so maybe the Fed drops 'transitory' from its language."

The stock market's wild ride should become less so once the U.S. central bank is no longer pumping liquidity in the markets, Ablin said. "The Fed needs to get out of the equation, it's like baseball on steroids. The Fed created an illusion. You take steroids away from baseball and you end of with a pretty boring game."