WASHINGTON, D.C.: The International Monetary Fund (IMF) on Thursday (Friday in Manila) cut its 2015 growth forecast for the United States and called on the Federal Reserve to put off a rate hike until conditions are stronger.
In an annual report of the world’s largest economy, the Fund said growth would reach only 2.5 percent this year due to the unexpected first quarter contraction, compared to the previous forecast of 3.1 percent in April.
It said growth is already rebounding from the stall. But it nevertheless strongly recommended that the Fed hold off on its planned interest rate hike until more resilience is shown, likely only in early 2016.
It said growth momentum this year had been sapped by “a series of negative shocks,” pointing to extremely harsh winter weather in parts of the country, the three-month West Coast ports slowdown that locked up trade, the sharp rise of the dollar and the downturn in the oil industry.
Still, the IMF said, “These developments represent a temporary drag but not a long-lasting brake on growth.”
“A solid labor market, accommodative financial conditions, and cheaper oil should support a more dynamic path for the remainder of the year.”
IMF chief Christine Lagarde said at a press conference on the report that the Fund sees US growth resuming a 3.0 percent pace over the rest of the year, and achieving that for the whole of 2016.
“We still believe that the underpinnings for continued expansion are in place.”
But she pushed for the Fed to hold off on a rate hike, which has been anticipated for as early as July, saying growth conditions are not yet firm enough for it.
The Fed has locked its benchmark federal funds rate at zero since 2008, and has been waiting for proof from a tightening jobs market and rising inflation that the economy is locked into higher gear to make its first increase toward a more “normal” monetary policy.
Without those signs, the IMF report warned, raising rates too soon could result in tighter financial conditions and even financial instability, that could then force the Fed to cut rates again.
That could both stir damaging volatility in world markets, and undermine the Fed’s credibility.
The Fed “should remain data-dependent and defer its first increase in policy rates until there are greater signs of wage or price inflation than are currently evident,” it said.
“Barring upside surprises to growth and inflation, this would put lift-off into the first half of 2016.”
While the IMF picture for the US economy was generally positive, it noted a few weaknesses or danger points that raise risks that would have impacts far beyond US borders.
The US dollar is “moderately overvalued,” the IMF said, impacting economic growth and job creation, and holding down inflation.
“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.”
The IMF review also included a new analysis of financial system stability which warned that the US needs to put more effort into monitoring and regulating non-bank financial institutions.
Investors’ search for yield in the current easy-money environment has increased the position in financial markets of lightly-regulated non-banks like insurance companies, investment funds and others, which are leveraging more and taking more risks, it noted.
This is pushing up asset valuations to what could be excessive levels, the IMF suggests, and yet for non-banks, “there is less visibility on the size and nature of the embedded risks and fewer regulatory and supervisory levers to manage those risks.”