Roundup: IMF urges U.S. Fed to delay interest rate hike until 2016

The International Monetary Fund on Thursday suggested the U.S. Federal Reserve should delay its first interest rate hike in almost nine years until the first half of 2016, as the Washington-based institution cuts its forecast for the U.S. economy in 2015.

Given the uncertainty in the economy and inflation outlook, the Fed should wait to raise rates "until there are more tangible signs of wage or price inflation than are currently evident," the IMF said in a statement after concluding the 2015 Article IV Consultation with the U.S. on Thursday.

The inflation rate in the U.S. now does not warrant a rate hike without risks in the next few months, said the IMF Managing Director Lagarde at a press conference on Thursday. Based on the judgment, the IMF believed the economy will be better off with a rate hike in early 2016, said Lagarde.

The price index for the personal consumption expenditure (PCE), a gauge for the inflation level preferred by the Federal Reserve, increased 0.1 percent year on year, and the PCE price index, excluding volatile food and energy, increased 1.2 percent from April a year ago.

"Deferring rate increases would provide valuable insurance against the risk of disinflation, policy reversal, and ending back at zero policy rates," the IMF said.

However, the Fed chair Yellen stressed in a recent speech that with oil prices no longer declining, she and other Fed officials believed the consumer price inflation will move up to 2 percent as the economy strengthens further and as other temporary factors weigh on inflation recede.

She hinted that the central bank was on track to raise its benchmark interest rate this year despite the weak performance in the first quarter. Market investors widely see September or even later as the most likely time for a Fed rate increase. The Fed has kept its benchmark short-term interest rate near zero since December 2008.

In line with the Fund's later liftoff suggestion, the IMF cuts U.S. economic growth forecast for 2015 down to 2.5 percent from its April's prediction of 3.1 percent.

The revised down forecast was largely due to the soft performance in the first quarter, Lagarde said. U.S. economy shrank at an annual rate of 0.7 percent in the first quarter, marking the third quarterly contraction after the financial crisis ended in mid-2009.

The contraction was in part due to harsh winter weather, labor disputes in Western port, slowdown in investment in energy industry, and effects of a strong U.S. dollar, which the IMF believed would be a temporary drag but not a long-lasting brake on growth.

"A solid labor market, accommodative financial conditions, and cheaper oil should support a more dynamic path for the remainder of the year," the IMF said.

In the statement, the IMF said the U.S. dollar is "moderately overvalued" and a further marked appreciation would be harmful against the background of diverging policies and growth in the U.S. and other developed economies.

But Lagarde said at the press conference that the IMF does not believe a strong dollar so far affected negatively the growth of the U.S. economy considering the oil price decline which has been a tradeoff to the circumstance of the appreciation of the dollar.

As a result of the strong dollar, net exports subtracted 1.9 percentage points from the economic growth in the first quarter. Lael Brainard, governor of the Fed board, warned on Tuesday that the strong dollar could continue to impose downward pressure on exports and the prices of imported goods.

The IMF also warned of the possibility of a less-than-smooth liftoff for the Fed, saying asset price volativlity following the Fed's first rate hike in almost nine years could have larger-than- anticipated negative effects on financial conditions and the spillovers to economies with close trade and financial linkages could be substantial. Endite