The International Monetary Fund has cut its growth forecast for the US economy and warned the Federal Reserve to wait until next year before embarking on interest rate rises.
In its annual assessment of the world’s largest economy, known as an Article IV report, the IMF downgrades its GDP growth forecast for 2015 from 3.1% to 2.5%, amid what it calls “significant uncertainties as to the future resilience of economic growth”. It also shaves its forecast for 2016, from 3.1% to 3%.
There have been mounting fears about the strength of the US recovery in recent weeks after an unexpected decline in the first quarter, with GDP contracting at an annual rate of 0.7%.
The IMF says growth should pick up later in the year as the impact of temporary factors, including bad weather and the West Coast port strike, start to fade. “These developments represent a temporary drag but not a long-lasting brake on growth,” it says. “A solid labour market, accommodative financial conditions and cheaper oil should support a more dynamic path for the remainder of the year.”
The Fed has been planning to start raising interest rates in the coming months, as unemployment continues to fall and the economy recovers. But the IMF’s experts make what they call, “the case for a later liftoff”, suggesting that their analysis shows the first increase should not take place until the first half of next year.
“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 says.
It adds that there are also likely to be damaging consequences for countries outside the US, many of which have benefited from the flood of cheap money. “The Fed’s first rate increase in almost nine years has been carefully prepared and telegraphed. Nevertheless, regardless of timing, higher US policy rates could still result in a significant and abrupt rebalancing of international portfolios with market volatility and financial stability consequences that go well beyond US borders.”
The IMF’s experts also warn of growing risks of a renewed bout of financial turmoil in the US, mentioning three areas of concern
- : The growing role of shadow banks, such as hedge funds, which are less understood and less well-regulated;
- The lack of liquidity in some bond markets, “which could lead to abrupt moves in market pricing”; and
- The potential vulnerability of large parts of the insurance industry, which “have taken on greater market risk”.
It called for a series of regulatory changes, including better coordination between the multitude of financial watchdogs in the US, and better collection and sharing of data across the sector.