The Federal Reserve last raised interest rates by 25 basis points on 16 December 2015. That was the first rate hike in nearly a decade. During that historic meeting, the Fed framed market expectations with their forecast of four rate hikes for 2016. Hence, the market expected a 25 basis point hike every quarter starting March 2016.

On 16 March 2016, the Federal Open Market Committee (FOMC) announced that they had decided to hold interest rates at the range of 0.25-0.50% instead of raising rates further. In addition, they changed their forecast from four to two rate hikes this year.

Source: Federal Reserve

This can be seen clearly in the Fed’s dot plot projection above. So what caused the Fed to reduce its forecast so drastically this year?

1. Foreign Economic Weakness

As the central bank of the United States, the Fed has the mandate to keep inflation ...