IMF Says Fed Should Delay Interest Rate Hike Until 2016

IMF: Federal Reserve Should Wait Until 2016 to Raise Interest RatesOn Thursday, June 4, 2015, the International Monetary Fund (IMF) urged the Federal Reserve to delay its interest rate hike until 2016 while it downgrades the U.S. economy’s outlook. (Source: Associated Press, June 4, 2015.)

The IMF said, “The underpinnings for continued growth and job creation remain in place.” But America’s “momentum was sapped in recent months by a series of negative shocks,” including a harsh winter and a strong dollar that is hurting U.S. exports.

“The economy would be better off with a rate hike in early 2016,” IMF Managing Director Christine Lagarde stated. (Ibid.)

U.S. Economy Struggling

The IMF predicts the U.S. economy will grow 2.4% this year, down from its April forecast of 3.1%.

The overall U.S. economy shrank in the first quarter of 2015 and U.S. gross domestic product (GDP) declined at an annual rate of 0.7% in the first three months of 2015. (Source: Bureau of Economic Analysis, last accessed June 4, 2015.)

The U.S. consumer prices index (CPI) fell 0.2% in April from a year earlier. The decline was driven by the energy index, which fell 19.4% over the last 12 months. (Source: Bureau of Labor Statics, last accessed June 4, 2015.)

In April, consumer expenditure dropped. Personal consumption expenditures (PCE) decreased by $2.6 billion, or less than 0.1%. (Source:Bureau of Economic Analysis, last accessed June 4, 2015.)

Consumer confidence in the U.S. fell to a six-month low in May as Americans became less sanguine about the prospects for the economy. The University of Michigan reported on Friday, May 29, 2015 that its final index of sentiment for the month decreased -5.4% to 90.7 from 95.9 in April. It marked the biggest decline since the end of 2012. (Source: University of Michigan, last accessed June 4, 2015.)

Federal Reserve and Interest Rates

As of May 1, 2015, the effective Federal Funds Rate stood at 0.12%. Over the last six years, the Federal Reserve has kept the funds rate close to zero. The members of the Federal Open Market Committee (FOMC) expect the federal funds rate to be around 0.625% and 1.625% in 2015 and 2016, respectively, up from its current 0.25%. (Source: Board of Governor Members of the Federal Reserve System, last accessed, June 4, 2015.)

On May 22, 2015, Federal Reserve Chair Janet Yellen stated, “For this reason, if the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate target.” (Source: Federal Reserve, last accessed May 22, 2015.)

While the Fed didn’t give a specific time frame, many analysts thought it could happen as early as June. With a raft of weak economic data rolling in, most now believe it will happen in September.