ECONOMY

IMF: Fed should wait until 2016 to raise interest rates

AFP 540962429 I FIN BRA RI

 

 

The Federal Reserve should wait until the first half of 2016 before raising interest rates because inflation remains too low and there are “significant uncertainties as to the future resilience of economic growth,” the International Monetary Fund said Thursday in its annual review of the U.S. economy.

After the economy shrank in the first quarter, the agency also cut its forecast for U.S. growth this year to 2.5% from 3.1% in April.

The IMF’s recommendation runs counter to Fed policymakers’ public statements that the central bank probably will raise it benchmark rate this year. The rate has been near zero since the 2008 financial crisis.

“Inflation is not progressing at a rate that would warrant, without risk, a rate hike in the next few months,” IMF Managing Director Christine Lagarde said at a news conference in Washington. “The economy will the better off with a rate hike in early 2016.”

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In its concluding statement of its consultation with the US, the IMF said, “There is a strong case for waiting to raise rates until there are more tangible signs of wage or price inflation than are currently evident.” It said its recommendation was based on the current trajectory of economic growth and inflation.

“Raising rates too soon could trigger a greater than expected tightening of financial conditions or a bout of financial instability, causing the economy to stall,” the agency added. “This would likely force the Fed to reverse direction, moving rates back down toward zero with potential costs to credibility.”

The IMF added that a later liftoff could force the Fed to raise rates more rapidly and a “modest overshooting of inflation” above the Fed’s 2% annual goal. But waiting longer “would provide valuable insurance against the risk of (unusually low inflation), policy reversal and ending back at zero policy rates.”

The Fed’s preferred measure of “core” inflation, which excludes food and energy costs, is running at 1.2% over the last year. Besides sluggish growth, prices have been held down recently by low oil prices and a strong dollar that makes U.S. imports cheaper for consumers.

Fed Chair Janet Yellen has indicated these developments are transitory, and Fed officials have said they expect inflation to head back toward the Fed’s 2% goal in “the medium term,” which roughly means by next year. Yellen has said the Fed doesn’t need to see inflation pick up but simply must be confident that it will so in the medium term.

 But the IMF predicted inflation won’t reach the Fed’s 2% target until mid-2017.

Lagarde said the economy’s weak first quarter was largely ue to temporary factors, such as the strong dollar, low oil prices and a labor slowdown at West Coast ports

“We still believe the underpinning for continued expansion are in place,” she said.

Still, the IMF said in a report, higher rates could have “larger than anticipated negative effects” on market-based interest rates, “growth, labor markets and “inflation outcomes.”

The U.S. economy has grown at a modest pace of just above 2% a year since the 2007-09 recession. Many economists expect 2.5% growth in 2015. While the labor market has improved, many Americans have been unemployed for more than six months or are working part-time even though they prefer full-time jobs, signs of slack and weakness in the economy.

The IMF added that a sharp rise in rates also could “result in a significant and abrupt rebalancing of international portfolios with market volatility and financial stability consequences that go well beyond US borders,” the fund said.”Spillovers to economies with close trade and financial linkages could be substantial.”

In 2013, signs that the Fed would take steps that could push up long-term interest rates prompted investors to move massive capital from emerging markets to the U.S., rocking the currencies of those markets.

 

 

[“source-usatoday.com”]

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