I.M.F. Recommends the Fed to Postpone Rate Hike

04 Jun, 2015

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The Federal Reserve was expecting to raise interest rates later this year. While there are some signs that the economy is ready, the International Monetary Fund suggests the Fed to delay raising rates until early 2016.

The Fed’s plan to raise interest rates, around September, is likely to cause volatility in stock markets and bond markets. However, any sell-off in the stock market is going to be limited, because the economy is doing fairly well. Janet L. Yellen, the Federal Reserve chairwoman, claimed that the continuous economic growth indicates that the initial step should be taken no later than September in a May 22 speech. The officials said that the Fed will be raising rates at a very gradual and “modest” pace, hence, interest rates will not have a negative effect on the economy for at least another year after the Fed starts hiking, because they are coming off a very low level. In order to get back to neutral rate, still 2 % rate hikes before start to worry about the interest rates having a dampening effect on the economy.

The big issue is the euro vs. dollar, and the rapid dollar surge. Euro is weakened tremendously and the dollar vs. all currency is strong – makes U.S. exports more challenged, whereas Europe now has weaker euro, which should help the European economy. Roberto Perli, a former Fed economist said, “it’s more expensive to buy U.S. products, cheaper for U.S. people to buy foreign products. That’s by far the first order effect.” Weak euro will help Europe and strong dollar will keep the U.S. from accelerating too much. “There is a risk that a further marked appreciation of the dollar – particularly one that takes place in an environment where policies to address growth deficiencies languish both in the U.S. and abroad – would be harmful,” said the I.M.F. If the dollar keeps going up, U.S. equity is going to come under a lot of pressure and eventually go down. It is important that the dollar goes flat to prevent the U.S. stock market from going down.

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