The Economy

IMF Advises Fed Not To Raise Rates Until 2016

Regardless of timing, higher U.S. policy interest rates could result in "a significant and abrupt rebalancing of international portfolios."
Katie Kuehner-HebertJune 4, 2015

The International Monetary Fund on Thursday again cut its U.S. growth forecast, and recommended that the Federal Reserve’s Open Market Committee delay raising interest rates until the first half of 2016.

The contraction in first-quarter gross domestic product “will unavoidably pull down 2015 growth,” which is now projected at 2.5%, the IMF said, which had earlier projected a 3.1% growth rate for 2015.

As such, the Fed should defer its first increase in rates “until there are greater signs of wage or price inflation than are currently evident,” according to the IMF.

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“Based on the mission’s macroeconomic forecast, and barring upside surprises to growth and inflation, this would put lift-off into the first half of 2016,” the IMF wrote.

Deutsche Bank chief U.S. economist Joe LaVorgna told Bloomberg that the IMF was “making a pronouncement on the Fed because the U.S. economy is still so important to the globe. The question is: Will the Fed listen and does it have any bearing on monetary policy decision-making? And my guess is no.”

Bloomberg wrote that Fed Chair Janet Yellen on May 22 said she still expects to increase interest rates this year if the economy meets her forecasts. The Fed, which hasn’t raised rates since 2006, will need to see continued improvement in labor market conditions and be “reasonably confident” that inflation will move back to 2%, Yellen said.

The IMF said that inflation should start rising later in the year but reach the Federal Reserve’s 2% medium-term objective only by mid 2017.

“When combined with dollar appreciation, falling global prices of tradable goods, and cheaper energy costs, core PCE (personal consumption expenditures) inflation is expected to fall in the coming months, to 1.2%” the IMF said.

The agency also said the U.S. dollar is “moderately overvalued.”

“So far, the global adjustment of exchange rates has represented a warranted shift of demand to those parts of the world economy that were being most threatened by deflation and stagnation,” the IMF said.

“Nonetheless, the stronger dollar is impacting U.S. growth and job creation, as well as weighing on inflation. There is a risk that a further marked appreciation of the dollar — particularly one that takes place in an environment where policies to address growth deficiencies languish both in the U.S. and abroad — would be harmful.”

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