The Federal Reserve should delay raising interest rates until the first half of 2016, the International Monetary Fund said as it cut its US growth forecast for the second time this year.
The lender also said that the dollar was “moderately overvalued” and a further marked appreciation would be “harmful,” in a statement released in Washington on Thursday on its annual checkup of the US economy.
"We still believe that the underpinnings for continued expansion are in place," IMF managing director Christine Lagarde said at a press briefing in Washington.
“The inflation rate is not progressing at a rate that would warrant, without risk, a rate hike in the next few months.”
That means the Fed should wait until early 2016, even if there’s a risk of “slight overinflation” relative to the central bank’s 2 per cent target, Ms Lagarde said.
A stronger dollar, declining oil investment and a west coast port strike in the first quarter will pull down US growth to 2.5 per cent this year, said the fund, which previously projected the world’s largest economy to expand by 3.1 per cent in 2015.
Greek standoff
Ms Lagarde also spoke about the debt standoff between Greece and its creditors including the IMF, saying a joint proposal from the creditors this week “has clearly demonstrated significant flexibility.”
She noted that Greek Prime Minister Alexis Tsipras indicated Wednesday that the nation would make a $339 million (€300m) payment to the IMF due on Friday.
Fed spokeswoman Michelle Smith declined to comment on the IMF's rate recommendation. Fed chair Janet Yellen on May 22nd 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 per cent, she said.
Investors currently expect the Fed to move in December, according to bets placed in interest-rate futures markets. The Fed’s policy-setting committee “should remain data dependent and defer its first increase in policy rates until there are greater signs of wage or price inflation than are currently evident,” the IMF said in its statement.
Based on the fund’s economic forecast, and “barring upside surprises to growth and inflation, this would put lift-off into the first half of 2016.”
The fund’s latest US monetary-policy advice is among its most explicit on record. In 2012, for instance, IMF staff suggested that further easing might be warranted if the outlook worsened, while in the crisis of 2008 they said rates “should stay on hold” until a recovery is established.
"The IMF is making a pronouncement on the Fed because the US economy is still so important to the globe," said Joe LaVorgna, chief US economist at Deutsche Bank Securities in New York, who expects a September rate increase. "The question is: Will the Fed listen and does it have any bearing on monetary policy decision-making? And my guess is no."
