IMF warns US Fed against 2015 rate hike

<p>It said the Federal Reserve should wait until 2016.</p>

The International Monetary Fund (IMF) has urged the US Federal Reserve not to raise interest rates this year. A 2015 rate hike risks adding to the growing economic and political threats to US growth, the IMF said in a new report.

Many analysts have predicted that interest rates would rise this year, despite recent data showing that the US economy shrank an annualised 0.7 per cent in the first quarter.

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. The dollar has risen about 20 per cent against a basket of currencies during the past 12 months and "growth could be significantly debilitated" by another rise in the dollar, it said.

Gradual rise necessary

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.

The report adds that weaker global growth would sap US exports and investment in certain sectors. "Finally, risks from Russia/Ukraine, Greece or the Middle East represent an unpredictable wild card with negative, but difficult to quantify, effects for the US."

Last spring, Federal Reserve Chairwoman Janet Yellen 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. 

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.