Rate rise calls evaporate as markets plunge, murmurs of Fed reversal

Fri Jan 15, 2016 11:13am EST
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* 10-year Treasury yield below 2 pct

* Global economy, markets fragile

* Recent history shows policy can be reversed

By Jamie McGeever

LONDON, Jan 15 (Reuters) - The worst ever start to a year for financial markets has left traders and economists rethinking the global monetary policy outlook, with some predicting the Federal Reserve will quickly reverse last month's historic rate rise.

The Fed lifted U.S. interest rates for the first time in nearly a decade on Dec. 16, signalling its faith that the economy had finally put the 2007-08 financial crisis behind it.

Ferocious volatility fuelled by worries about China's currency and stock markets has since wiped trillions of dollars off world stocks, however, while a slowing China has exacerbated worries about the robustness of U.S. economic growth.

Interest rate futures traders are already paring back their expectations of when the Fed might tighten again while several big banks this week dovishly revised their 2016 outlooks for the Bank of England, European Central Bank and Bank of Canada.

"You shouldn't underestimate that a change in where the market sees rates going could happen pretty quickly. Another month of what we've seen this year, and we could be there," said Steve Barrow, head of G10 strategy at Standard Bank in London.   Continued...