IMF Urges Fed to Wait on Interest Rates Until 2016 

The International Monetary Fund on Thursday slashed its forecasts for U.S. economic growth, calling for the Federal Reserve to hold off its first rate increase in nearly a decade until 2016.

In its annual review of the U.S. economy, the IMF said a series of negative shocks, including a strong dollar and bad weather, had sapped momentum for job creation and expansion, prompting a downgrade to its growth expectations to 2.5% for the year. Its last estimate in April was for a 3.1% expansion.

The West Coast port labor dispute and the collapse in oil-sector investment amid plummeting energy prices also dragged on growth in the first quarter. Long-term unemployment and high levels of part-time work point to continued slack in the labor market, with wage data showing only tepid growth.

The dollar, which has surged against other major currencies in the past year as the U.S. economy strengthened and other central banks revved up their easy-money policies, is damping growth and job creation. The IMF said the currency already is “moderately overvalued” and further marked appreciation of the dollar would be harmful to the U.S. economy.

Barring upside surprises to growth and inflation, the fund said the weaker outlook means the Fed should defer its rate increase until the first half of 2016. Given the “significant uncertainty around inflation prospects, the degree of slack and the neutral policy rate, there is a strong case for waiting to raise rates until there are more tangible signs of wage or price inflation,” the fund said.

The IMF’s call for a deferred rate liftoff comes despite warning at the same time that risks are building in the financial system, notably in the insurance and money markets. Amid the prolonged period of ultralow rates, investors are pouring their cash into riskier assets in the search for higher returns.

But the IMF believes weak growth outweighs the financial risks posed by a prolonged ultralow rate environment.

Still, the fund outlined a host of recommendations to strengthen oversight of the financial system. In particular, the fund took the Financial Stability Oversight Council to task, saying it was “critical” for the panel to bolster its management of risks.

Regardless of the when the Fed raises rates, the IMF warned that the increase could trigger “significant and abrupt rebalancing of international portfolios with market volatility and financial stability.” Inflation also could rise faster than expected, potentially provoking a sudden shift upward in borrowing costs.

“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” around the world, the IMF said. “Spillovers to economies with close trade and financial linkages could be substantial.”

The IMF also once again criticized what it called “policy dysfunction” over the federal budget. The inability of Congress and the White House to agree on a budget is fostering market uncertainty that is damaging to the U.S. economy, the fund said, especially given the potential for more government shutdowns. Public finances, the IMF said, remain on an unsustainable path.

Source: WSJ – IMF Urges Fed to Wait on Interest Rates Until 2016

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