IMF calls on Fed to delay raising interest rates

WASHINGTON: The International Monetary Fund said on Thursday that the Federal Reserve should wait until next year before raising its benchmark interest rate, citing the stubborn persistence of sluggish inflation.

In an annual review of the US economy, the IMF said growth had been slower than it expected, and it cut its 2015 forecast to 2.5%, from 3.1%.

While growth is likely to strengthen in the coming months, it said the Fed risked moving too quickly if it started raising rates this year.

“We are saying that the economy would be better off with a rate hike in early 2016,” Christine Lagarde, the fund’s managing director, said at a news conference on Thursday.

The IMF’s cautionary message comes as Fed leaders continue to indicate they would like to start raising rates this year.

The Fed’s chairwoman, Janet Yellen, said last month that she anticipated raising rates as long as growth remained on track.

The Fed plans to release its own updated economic and policy forecasts after the next meeting of the Federal Open Market Committee on June 17.

The Fed has held rates near zero since December 2008, and officials have said that they are eager to begin the slow journey back toward normalcy. But growth continues to disappoint their expectations.

The economy shrank at an annual rate of 0.7% in the first quarter, according to the latest government estimate. Job growth has weakened. And the Fed’s preferred measure of inflation rose just 1.2% during the 12 months through April, the government said this week.

The IMF said that the strength of the dollar, caused partly because of weakness in the rest of the developed world, was dragging on domestic growth and that things could get worse.

“There is a risk that a further marked appreciation of the dollar — particularly one that takes place in an environment where policies to address growth deficiencies languish both in the US and abroad — would be harmful,” it said.

Given that the US economy has room to grow, the IMF said that the risks of raising rates too quickly outstripped the risks of waiting too long.

Lagarde said it also made sense for the Fed to raise rates slowly.

Fed officials, too, have expressed concern about the global economy.

Lael Brainard, a Fed governor, said in a speech this week that “foreign headwinds” were causing problems that could lead the Fed to delay interest rate increases.

She said the Fed should adopt a stance of “watchful waiting” and offered the cautious assessment that “liftoff could come before the end of the year.”

Only a few Fed officials, however, have suggested that the Fed should wait until next year.

One of those officials, Charles Evans, president of the Federal Reserve Bank of Chicago, reiterated on Wednesday in Chicago that the Fed should wait to raise rates until inflation strengthens.

“The hurdle is pretty high for raising rates at the moment,” he told reporters.

That remains a minority view among Fed officials. Surveys of Wall Street analysts show that most expect the Fed to start raising rates in September. Goldman Sachs Group Inc said last week that it expected the Fed to start either in September or December.