In an extremely unconventional development, The International Monetary Fund (IMF) has publicly urged the Federal Reserve to delay raising interest rates until the first half of 2016. The IMF reduced its growth forecast for the U.S. economy for the second time this year.
During a press briefing in Washington on Thursday, IMF Managing Director Christine Lagarde said, “The inflation rate is not progressing at a rate that would warrant, without a risk, a rate hike in the next few months.”
The Federal Reserve’s inflation target is 2%. According to Lagarde, the central bank should wait until early 2016 before increasing interest rates even if there is a risk of over-inflation compared with its 2% target.
Lagarde added that they still believed that the “underpinnings for continued expansion are in place.
The Federal Open Markets Committee (FOMC) “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,” according to the IMF in a statement.
Federal Reserve expected to increase interest rates this year
Last May 22, Federal Reserve Chairperson Janet Yellen still expects an increase in interest rates this year if the economy meets forecasts.
According to her, policy makers wants to be “reasonably confident” that the inflation will move back to 2%. They also want to see a continued improvement in the labor market before implementing the first interest rate hike. Since 2006, the central bank has not increased interest rates.
Analysts and investors are monitoring economic data to determine as to when the Federal Reserve will begin raising interest rates. Brian Moynihan, Chairman and CEO of Bank of America expected an interest rate hike in September citing the reason that the U.S. economy is fundamentally better.
Bloomberg noted the bets placed on interest-rate futures market showed that investors are currently anticipating the Federal Reserve to act in December.
Joe LaVorgna, chief U.S. economist at Deutsche Bank Securities, commented, “The IMF is making a pronouncement on the Fed because the U.S. economy is still so important to the globe. The question is: Will the Fed listen and does it have any bearing on monetary policy decision-making? And my guess is no.”
IMF says the U.S. dollar was “moderately overvalued”
The IMF said the U.S. dollar was “moderately overvalued.” The international lender warned that further marked appreciation would be “harmful. Over the past 12 months, the dollar climbed 13% in real effective terms.
“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 U.S. and abroad — would be harmful,” according to the fund.
The IMF estimated that the U.S. economy will grow 2.5% this year, which was lower than its previous growth for of 3.1%. According to the IMF, a stronger dollar, declining oil investment, and the strike on the West Coast negatively impacted the economy in the first quarter.