On Tuesday, July 7th, the International Monetary Fund (IMF) warned that the U.S. economy may be stalling if the interest rate hike comes too soon.
The IMF called on the Federal Reserve to delay a rate hike until 2016. This is the second push from the IMF to delay the interest rate increase which is at odds against what the Federal Reserve has signaled in the past few months. To read into this more in depth, see “IMF Says Fed Should Delay Interest Rate Hike Until 2016.”
The Federal Reserve has repeatedly said that it plans to raise the federal funds rate after being kept near zero for nearly a decade. September seems to be a likely timeline for the rate hike.
Policymakers have been monitoring the inflation rate and labor market closely in order to consider the raise in the interest rate. While the job market seemed to get stronger, the inflation rate still remains way below the targeted rate.
Meanwhile, the IMF lowered its growth forecast for the U.S. economy for the second half of 2015, saying that there is too much uncertainty surrounding the inflation, employment, and wages for the Fed to increase the interest rate.
“Right now, we see inflation indicators actually declining in the U.S.,” said Nigel Chalk, the IMF’s U.S. mission chief. “They’re still relatively far from the Fed’s medium-term goal of 2%.” (Source: The Wall Street Journal, July 8, 2015.)
Domestically, although the Federal Reserve has indicated that rates will likely rise only gradually in the coming years, a premature rate increase could spark turmoil in equity markets and eventually halt the overall U.S. economy.
Globally, a faster slowdown in China’s economy and its latest massive selloff in its stock market remains unresolved in addition to Greece’s debt crisis; all of which could hit the already-fragile U.S economy.
All told, investors should be cautioned as the U.S. economy is in a high potential risk of stalling from its own central bank.