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.
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