Fed rate hike could cause panic in emerging markets, World Bank warns

<p>A World Bank chief economist said the Fed should delay any rate rise.</p>

A September rate hike from the US Federal Reserve could trigger "panic and turmoil" in emerging markets, a World Bank chief economist has warned. Kaushik Basu said the central bank should wait instead until the global economy is in a more stable position.

He told the Financial Times that rising uncertainty over growth in China and its impact on the global economy meant a Fed decision to raise its policy rate this week could lead to "fear capital" leaving emerging economies as well as to sharp swings in their currencies.

"Immediate turbulence"

"I don’t think the Fed lift-off itself is going to create a major crisis but it will cause some immediate turbulence," Mr Basu said. "It is the compounding effect of the last two weeks of bad news with that [China devaluation] . . . In the middle of this it is going to cause some panic and turmoil."

"The world economy is looking so troubled that if the US goes in for a very quick move in the middle of this I feel it is going to affect countries quite badly," he said.

The warning echoes a recent plea from the International Monetary Fund (IMF), who urged the US Federal Reserve not to raise interest rates this year, as it "risks adding to the growing economic and political threats to US growth".

The IMF also warned that a rate rise would trigger more gains in the value of the dollar, at a time US share prices are hitting unsustainable levels.

Market volatility risk

IMF managing director Christine Lagarde believes that a gradual rise in the US benchmark federal funds rate would be appropriate, while higher rates could cause market volatility.

Federal Reserve Chairwoman Janet Yellen recently said that a rate hike is still on the cards for 2015. She said that if the US economy continues to strengthen, "it will be appropriate at some point this year to take the initial step to raise the federal funds rate".

However, she added: "After we begin raising the federal funds rate, I anticipate that the pace of normalisation is likely to be gradual. The various headwinds that are still restraining the economy, as I said, will likely take some time to fully abate, and the pace of that improvement is highly uncertain. We have no intention of embarking on a pre-set course of increases in the federal funds rate after the initial increase."

Interest rates have been kept to near zero since the financial crisis that began in 2007, as part of a set of measures taken by the Federal Reserve to help stabilise the US economy and financial system. 

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