IMF Urges US to Postpone Interest Rate Hike Until 2016 2015-06-05

The International Monetary Fund is urging the U.S. central bank to delay its planned interest rate hike until 2016. Although the IMF says the underpinnings for continued growth are still in place, IMF Managing Director Christine Lagarde says recent data suggest U.S. growth is likely to remain subpar. Her comments reflect new concerns about the world's largest economy, which shrank 0.7 percent in the first three months of the year.

Earlier optimism about the U.S. economy has faded a bit, after new data showed momentum slowing between January and March the result of a harsh winter and a stronger U.S. dollar that has made U.S. goods more expensive abroad.

IMF chief Christine Lagarde says raising U.S. rates too soon could result in significant market volatility around the world.

"In weighing this risk, we think that there is a case for waiting to raise rates until there are more tangible signs of wage or price inflation than are currently evident. So, in other words, we believe that a rate hike would be better off in early 2016," said Lagarde.

Buoyed by a steady improvement in the labor market, the central bank had signaled a modest rate hike by the middle of the year, its first in nearly nine years. But the contraction in the first quarter and a slowdown in spending suggest consumers remain wary. Consumer spending rose only 1.8 percent in the first three months of 2015 a surprisingly modest increase given the more than five percent jump in disposable income, says Federal Reserve board member Lael Brainard.

"Continuing softness in consumption this year would naturally raise some questions about whether there's a more persistent change afoot in particular, whether the financial crisis may have caused consumers to be more cautious about spending gains in income and wealth that are perceived to be temporary," said Brainard.

But others believe the U.S. slowdown was an aberration. Ethan Harris, head of global economics research at Bank of America Merrill Lynch, expects a rate hike in September.

"Relative to where we were say a few years ago, the banking sector is in much better health, the housing market's improving, we don't have any major fiscal shocks going on right now, we don't have a fiscal cliff looming, we don't have a shutdown looming in Washington, so you kind of take a better backdrop for the economy in terms of healing," said Harris.

A new survey of the American Bankers Association's top economists predicts a rebound in the second half of the year, but the IMF has downgraded its forecast for U.S. economic growth from 3.1 percent to 2.5 percent in 2015.