The International Monetary Fund Thursday called on the U.S. Federal Reserve to hold off on its first hike in benchmark interest rates until early 2016, citing sub-par growth and global uncertainties.
The IMF generally makes headlines for prescribing tough medicine to smaller, under-performing economies. In issuing the findings of its latest Financial Sector Assessment Program, it raised new questions about when and how the Fed begins hiking its key rate for the first time since dropping it to near zero in December 2008.
The benchmark federal funds rate influences borrowing costs for mortgages, car loans and a wide range of other lending. The Fed has kept it near zero for almost seven years, in a bid to stimulate risk taking in stocks and avoidance of safe havens such as U.S. government bonds. It’s had a deliberately distorting effect on financial markets, and the end of the effort could be turbulent.
Financial markets had first expected a so-called liftoff in rates on June 17. The expected start was then pushed back until September. That’s partly because revisions late last month to first-quarter U.S. growth estimates showed the economy shrank during the first three months of 2015, sparking analysts to begin thinking of perhaps a December liftoff.
And then the IMF, the global body overseeing currencies and financial stability, suggested a date even further out.
It warned Thursday that the Fed and its chair, Janet Yellen, are in a pickle. Raising rates too early could cause U.S growth to stall and spillover to the already sluggish global economy. Waiting too long, however, could lead to inflation that would require an even-faster pace of rate hikes to tame rising prices, slowing economic activity in the process.
“Given the balance in the likelihood and severity of these risks … there is a strong case for waiting to raise rates until there are more tangible signs of wage or price inflation than are currently evident,” the IMF report concluded, adding that barring positive surprises, the current near-zero rates should remain “into the first half of 2016.”
The IMF’s forecast now calls for annual U.S. economic growth of 2.5 percent this year, about what most members of the rate-setting FOMC expect. Yet most Fed governors have hinted in speeches this year that they want to raise rates at least once and soon. With the same economic outlook, they seem to lean in a different direction than IMF economists.
“We’re confident that the IMF consulted with the Fed before this announcement. However, we doubt this is enough to sway the Fed,” said Neil Dutta, head of U.S. economics for Renaissance Macro Research LLC in New York. He still expects a September rate hike.
Lost in the buzz about rate hikes were two unusual comments in the IMF’s report. It cited “current fiscal policy dysfunction,” warning that the inability of Congress and the White House to work together on budget and spending bills “creates a level of fiscal uncertainty that is damaging to the U.S. economy.”
The chances of a government shutdown in October or another standoff over raising the debt ceiling “represent important (and avoidable) downside risks to growth and job creation which could move into the forefront, once again, later in 2015,” the IMF warned.
The IMF report also included a shout-out of sorts to the Affordable Care Act, or Obamacare, as well as an unusually detailed commentary on costs in the U.S. health system.
While not naming the president’s signature legislation, potentially threatened by a pending Supreme Court decision, the IMF noted that cost pressures have declined. It called for even more efforts to that end.
“Legislation could usefully focus on ensuring a better coordination of services to patients with chronic conditions, steps to contain overuse of expensive procedures and technologies including through a higher degree of cost sharing with beneficiaries,” the IMF said, appearing to endorse less-generous benefits for future Medicare recipients.
It also called for eliminating tax breaks for more generous employer-sponsored health plans.