According to the International Monetary Fund, the Federal Reserve "should postpone the first increase in interest rates until there are better signals on wages and inflation", therefore at least to the "first half of 2016". This is what can be read in the closing statement of the IMF at the end of the Article IV monitoring mission in the United States.
The Washington-based institution argues that the first rate hike in nearly nine years “was carefully planned and anticipated,” however, regardless of the timing, a rate hike “could still result in significant and sudden rebalancing of international portfolios, with consequences on market volatility and financial stability that can go beyond the American borders”.
In this context, the Fed must be careful not to act too soon or too late. Raising the cost of money too early "could trigger a greater tightening of forecasts of financial conditions or generate financial instability, with a stall of the economy", says the IMF. This would force the Fed to reverse course, bringing rates back close to zero, "with potential damage to the institution's credibility".
Conversely, raising rates too early could cause inflation to rise above the Fed's 2% target. According to the IMF, "this would trigger more rapid increases in interest rates, with unpredictable consequences, including on financial stability".
GDP: CUT FORECASTS ON 2015 AND 2016
The Fund also cut its US GDP forecasts for the second time in two months, bringing those for 2015 to +2,5% and those for 2016 to +3% (previous estimates were +3,1% in both cases). The Fund believes that the accommodating financial conditions, the drop in oil and a solid labor market will support the American economy in the remaining part of the year, but the trend in the first few months "will inevitably drag down growth in 2015".
It is therefore a question of "a temporary slowdown and not a lasting brake on growth". In the United States "there continues to be support for growth and job creation", but the momentum has been held back in recent months "by a series of negative shocks", such as unfavorable weather conditions, the contraction of investments in the oil sector and the effects of the strong dollar.
The labor market is recovering and "various indicators suggest that it is returning to pre-crisis normality", although long-term unemployment, held back by participation, and high levels of part-time employment represent a brake. Wages show "tepid growth".
The IMF expects an unemployment rate of 5,3% this year and 5,2% in 2016, while "core" inflation should come in at 1,3% this year and 1,5% this year. next year, only to “reach the Federal Reserve's 2% target in mid-2017”.
"POSSIBLE RISKS FOR FINANCIAL STABILITY"
In the United States, however, potential "pockets of financial stability risk" are emerging, which should persuade the authorities to improve the resilience of the financial system. In fact, “the regulatory reform remains incomplete and the structure of the supervisory system needs to be strengthened”.
Efforts should be aimed at "strengthening the macro-prudential framework, developing regulatory tools and filling regulatory and supervisory gaps". However, the IMF admits that "much has been done in recent years to strengthen the American financial system", but it is important to "ensure that no steps are taken back" from what has been done.
“MODERATELY OVERVALUED DOLLAR”
At current levels, the dollar is "moderately overvalued" and, consequently, "the current account deficit could further move away from medium-term fundamentals", to over 3% of GDP. The greenback has gained 13% in real effective terms over the past twelve months, a “rapid move” driven by differences in growth, different monetary policy trajectories of systemically important economies and changing investment portfolios, plus oriented towards dollar assets.
So far, the IMF underlines, the exchange rate adjustments have been linked to changes in demand, however "the stronger dollar affects American growth, job creation and inflation". There is also the risk that "a further sharp appreciation of the dollar could be harmful".
