4th Jun 2015 15:22
WASHINGTON (Alliance News) - Following its latest consultation on the US economy, the International Monetary Fund has suggested the Federal Reserve should delay raising interest rates until next year.
The IMF's call for delaying the first rate hike came as the lender lowered its forecast for US economic growth this year to 2.5% from 3.1%.
The lender noted that the US economy's momentum was derailed in the first quarter by unfavorable weather, a sharp contraction in oil sector investment, the West Coast port strike, and the effects of the stronger dollar.
While the IMF expects these developments to be only a temporary drag, the weakness in the first few months of the year is still expected to pull down 2015 growth.
The lender also said several indicators suggest the outlook for the US jobs market is returning to pre-crisis norms but noted that wage indicators have shown only tepid growth.
When combined with dollar appreciation, falling global prices of tradable goods, and cheaper energy costs, the IMF said core consumer price inflation is expected to fall to 1.2% by the end of September.
The IMF said inflation should start rising later in the year but won't reach the Fed's 2% medium-term objective until mid-2017.
The lender subsequently said the Fed should defer its first increase in interest rates until there are greater signs of wage or price inflation.
Based on its macroeconomic forecast and barring upside surprises to growth and inflation, the IMF said this would push the first rate hike into the first half of 2016.
The IMF acknowledged that the first rate hike has been carefully prepared and telegraphed but said the increase could still result in a significant and abrupt rebalancing of international portfolios with market volatility and financial stability consequences that go well beyond US borders.
"Alternatively, even without policy changes, higher inflation numbers unaccompanied by better activity data could lead to a sudden upward shift in the yield curve or risk spreads," the IMF said.
"In either case, asset price volatility could last more than just a few days and have larger-than-anticipated negative effects on financial conditions, growth, labor markets, and inflation outcomes," the lender added. "Spillovers to economies with close trade and financial linkages could be substantial."
Recent signs of economic sluggishness have led most analysts to predict that the Fed will refrain from raising rates at its meeting later this month, although many still expect a rate hike in September.
Fed Chair Janet Yellen has repeatedly stressed that the increase in rates will be data dependent and that the process of raising rates will be gradual.
Copyright RTT News/dpa-AFX