IMF urges Fed to wait until 2016 to raise interest rates

Washington (Jun 5)  The International Monetary Fund urged the Federal Reserve on Thursday to put off raising short-term interest rates until next year because the U.S. economy still needs help.

In its yearly check-up of the United States, the IMF predicted that the economy would grow just 2.5 percent this year, down from its April forecast of 3.1 percent. The downgrade reflects the economy’s stumbling start to the year: Gross domestic product fell in the first quarter, tripped up by harsh winter weather and the export-killing strength of the dollar.

Since December 2008, the Fed has kept the short-term interest rate it controls near zero. Fed chairwoman Janet Yellen said last month she expects to begin raising rates this year. Many economists expect a rate hike at the Fed’s September meeting.

A rate increase probably won’t have a big or immediate impact on most consumer-loan rates. For one thing, the Fed is expected to ratchet up rates gradually. For another, rates don’t move in lockstep. Mortgage rates, for example, are tethered to long-term rates, such as the yield on the 10-year Treasury note. Those rates can move up or down based on factors that have little to do with the Fed, such as foreigners’ demand for the safety of U.S. Treasurys.

A look at the competing cases for the Fed’s next move:

Don’t be hasty

IMF Managing Director Christine Lagarde said the risks of raising rates too soon — and wounding the economy before it’s reached full strength — outweigh the risks of waiting a bit too long and allowing inflation to creep up.

“The economy would be better off with a rate hike in early 2016,” Lagarde said at a news conference.

The Commerce Department reported last week that the economy shrank at an annual rate of 0.7 percent from January through March. A widening trade deficit was largely to blame, reducing growth by 1.9 percentage points. The stronger dollar makes U.S. exports more expensive abroad and foreign imports cheaper in America.

Inflation still is well short of the Fed’s 2 percent target. The IMF doesn’t see it hitting that level until mid-2017. The inflation threat looks distant now: Consumer prices were lower in April than a year earlier, largely because of tumbling oil prices.

The IMF called for the Fed to hold off on a rate increase until “there are greater signs of wage or price inflation than are currently evident.”

Do it, already

Despite the nasty first quarter, “we’re seeing more signs that the economy is gathering momentum and that a rate increase in September looks more appropriate,” said Bernard Baumohl, chief global economist at the Economic Outlook Group.

If the Fed waits too long, it could lose its grip on inflation — and its inflation-fighting credibility with financial markets.

“If there’s a belief that the Federal Reserve is behind the curve in controlling inflation, more investors would lose confidence,” Baumohl said.

Another worry: Super-low interest rates encourage investors to seek higher returns in riskier investments. That can drive up the prices of stocks, long-term bonds and other investments dangerously high.

“The longer the Fed waits, the higher the price they are going to pay in terms of the market volatility that could occur, including the potential of a crash in the stock market and the bond market,” said David Jones, an economist who has written books on the Fed.