IMF Warns That Fed Could Stall US Economy

The International Monetary Fund (IMF) is a global organization made up of 188 member countries that works to foster international financial stability and sustainable growth. Thus, when it weighs in on a nation’s financial policies, those opinions usually carry some weight. This is true even when the economy in question belongs to the United States.

The International Monetary Fund (IMF) is a global organization made up of 188 member countries that works to foster international financial stability and sustainable growth. Thus, when it weighs in on a nation’s financial policies, those opinions usually carry some weight. This is true even when the economy in question belongs to the United States.

As reported by the Wall Street Journal, the IMF warned on Tuesday that the Federal Reserve risks stalling the U.S. economy by raising interest rates too soon. It went on to suggest that the US central bank should hold off on plans to raise interest rates, rumored for September 2015, until sometime next year.

The Fed has signaled an intention to raise interest rates despite a lackluster first quarter for the US economy due to reports that job growth has been much better than most had expected. While the IMF had cut its growth forecast for the US economy for 2015 from 3.1 percent to just 2.5 percent, the Fed appears to view the situation quite differently. This has led the IMF to fear that the Fed may act prematurely and set the nation on a path that will undo any growth the economy might experience during the second quarter and the rest of the year.

The IMF noted that its opinion centered on the remaining uncertainty about US inflation, employment, and wage prospects. “Raising rates too early could trigger a greater-than-expected tightening of financial conditions due to some combination of a further upward swing in the U.S. dollar, lower equity prices, and/or a repricing of risk premia and the yield curve,” the IMF said in its annual report on the US economy. “There is a risk that the tightening impact on the economy could go well beyond the initial [0.25 percentage point] increase in the fed-funds rate, creating a risk that the economy stalls,” fund staff said.

Such economic growth reversals occasioned by over-eager central bank measure are not without precedent. Japan, the EU, and Sweden have all experienced these situations, which typically led to a quick reversal of policy. The IMF fears that in an economy as large and powerful as that of the United States, such a reversal could undermine the Fed’s credibility. This, in turn, could have longer-term and much more deleterious impact on both national and global economic performance.

Part of the IMF’s warning flows from the ongoing financial crises in Greece and Ukraine. The IMF fears that a collapse in these nations could affect a broader swathe of the European and global economies. This, in turn, could draw down growth in the US. China’s flagging performance also raised concern, particularly as one of the United States’ largest trading partners and the holder of more US debt than any other nation in the world. The IMF considered these situations “wild cards” that it believes the Fed may not have adequately considered with its hinted at rate increase.