Fed rate U-turn? Not likely, analysis shows

The disconnect in the markets: Deutsche Bank Pro
The disconnect in the markets: Deutsche Bank Pro   

Signs of economic weakness and a global stock market sell-off have lowered the odds that the Federal Reserve will continue raising interest rates at its next regular meeting in mid-March.

But might the Fed reverse course and start cutting rates again? Not likely, according to an analysis by researchers at Oxford Economics of 30 years of policy decisions by central banks around the world.

Since the U.S. central bank embarked on rate "liftoff" in December — after nearly a decade of pushing rates to near zero — a global market sell-off and weak economic data have prompted many Fed watchers to predict the central bank will proceed slowly on its new path to higher rates.

Among policymakers, Fed "hawks" — who support raising the cost of borrowing to more "normal" levels — argue that an improved job market and a gradual rise in inflation validate the recent policy shift to boosting rates. Restoring rates to higher levels would also give central bankers more room to cut rates later if the U.S. economy slipped into another recession.

But other central bankers are leery of further rate increases, on the grounds that a slumping global economy is already creating a major headwind for the U.S.

One Friday, Fed Gov. Lael Brainard told a monetary policy conference in New York that economic weakness at home, along with "heightened spillovers" from abroad "could result in a lower policy path in the United States relative to what many had predicted."

Read More Fed's Brainard flags low rate future

Since December, market prices for federal funds interest rate futures — a bet on where the cost of overnight borrowing is headed — indicate that traders and investors agree that the central bank is likely to remain slow to boost rates this year.

Some Fed watchers have even suggested the central bank may have moved too quickly to hike rates and faces the prospect of easing policy again to spur economic growth.

"It's far more likely that they'll have to reverse themselves as a number of other countries have, like Sweden and others, where they raise the rates thinking it'll be fine and then have to drop it," University of Chicago economist Austan Goolsbee, a former Obama advisor, told CNBC last month.

Read MoreGoolsbee says Fed may cut rates in 2016

But if history is any guide, the odds are slim that the Fed will embark on a policy "U-turn" and reverse course within six months of a policy shift, according to the Oxford Economics analysis. Central bankers around the world, they found, have become far less likely to flip-flop on policy than they were 30 years ago.

Among the 20 central banks they looked at, policy rate reversals within six months of a previous shift accounted for about 20 percent of rate decisions in the 1980s, dropping to 13 percent in the 1990s and just 7 percent from 2000-2015.

In the U.S., the shift was even greater. Some 30 percent of Fed rate decisions in the 1980s amounted to short-term U-turns, falling to 3 percent in the 1990s. Since 2000, there have been no such policy U-turns.

The authors of the report speculate that part of the reason for the relative stability is that central banks are less likely to use interest rates to manage short-term changes in the value of their currencies than in the past. And central banks, especially the Fed, pay less attention to short-term changes in the money supply than they did in the 1980s, the authors noted.

"Central banks may also have got better at their job, reducing the 'policy error'-type reversals," they wrote. "The general drop in worldwide inflation since the 1980s has also meant less volatility in inflation and interest rates."

As long as the financial markets remain unsettled and the global economy slows, the Fed's policy path will remain far from clear. But speaking to Congress earlier this month, Fed Chair Janet Yellen said she didn't think a policy U-turn was likely.

"There is always a risk of a recession ... and global financial developments could produce a slowing in the economy," she said.

"I think we want to be careful not to jump to a premature conclusion about what is in store for the U.S. economy. I don't think it is going to be necessary to cut rates."