IMF urges Fed to put off rate rise until 2016

The International Monetary Fund has urged the Federal Reserve to wait until next year to raise interest rates, cautioning that the central bank’s credibility was at stake and that there was too much uncertainty to justify a much-anticipated lift-off.

In its annual review of the state of the US economy released on Thursday the IMF said it expected the US economy to grow 2.5 per cent this year despite a contraction in the first quarter

“The underpinnings for continued growth and job creation remain in place,” fund economists wrote.

While growth had been derailed in the first three months of 2015 by the effects of a strong dollar, “unfavourable weather”, a West Coast port strike and a sharp contraction in investment in the oil sector those all amounted to “a temporary drag but not a long-lasting brake on growth”, fund economists wrote.

But the IMF said conditions were still not right for the Fed to raise rates for the first time in almost a decade.

It urged the central bank to wait for “greater signs of wage or price inflation than are currently evident”.

“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,” IMF economists wrote, adding that they did not expect inflation in the US to reach the Fed’s 2 per cent target until 2017.

The fund warned that there were still “significant uncertainties as to the future resilience of economic growth” and that the Fed’s credibility was at stake.

“Raising rates too soon could trigger a greater-than-expected tightening of financial conditions or a bout of financial instability, causing the economy to stall. This would likely force the Fed to reverse direction, moving rates back down toward zero with potential costs to credibility,” the IMF economists wrote.