IMF and World Bank say no to Fed rate rise

by Chris Becker

Following calls by IMF chief Christine Lagarde over the weekend for the US Federal Reserve to reconsider raising its interest rates, the World Bank is now adding to the chorus.

From the FT:

The US Federal Reserve risks triggering “panic and turmoil” in emerging markets if it opts to raise rates at its September meeting and should hold fire until the global economy is on a surer footing, the World Bank’s chief economist has warned.

Rising uncertainty over growth in China and its impact on the global economy meant a Fed decision to raise its policy rate next week, for the first time since 2006, would have negative consequences, Kaushik Basu told the Financial Times.

Such a decision could yield a “shock” and a new crisis in emerging markets, Mr Basu told the FT, especially as it would come on the back of concerns over the health of the Chinese economy that have grown since Beijing’s move last month to devalue its currency.

He said that, even though it had been well-advertised by the Fed, any rise would lead to “fear capital” leaving emerging economies as well as to sharp swings in their currencies. The likely strengthening in the dollar would also hamper US growth, he said.

This is all very sensible advice and all the factors that would require an imminent rate rise – rising inflation, a breakout in wages, plummeting unemployment – do not exist or are marginal at best in the world’s biggest economy.

But interest rate hawks are getting flighty after being in the wilderness for nearly 10 years. Something has to give.

But it won’t be this September and possibly even this calendar year as we go into the ever ebullient Christmas consumer orgy. On the other side in 2016 might be better tactically for the first rate rise.

Whatever the case the longer term view is that of lower global growth as the BRICs, other emerging markets and Europe try to navigate out of the post-GFC environment, still engorged with mountains of public and private debt. The World Bank’s most recent forecast of 2.8% is looking more and more optimistic.

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  1. how is keeping IR at zero while economy is growing at the highest possible rate (highest possible rate at present and foreseeable future) sensible?

    What is fed going to do in a year when economy starts falling again?

    concept of economic growth is obsolete in western countries, there is nothing that can create the growth in future:
    – “technological innovation” is working on fake levels for a decade or more (there was no significant technological innovation since IT bubble in 2000)
    – all the conceivable asset bubbles are already over-inflated
    – consumption is already unsustainable and on borrowed terms

    keeping rates at zero and making everyone used to this state just makes future (near and distant) much worse

    the scary thing is that at the present the only thing that could fuel growth is destruction: war, natural disasters, social unrest and low rates that benefit top 1% just make that more scary ….

    • doctorx mentions war as a possible outcome of extended low IR. I try not to be alarmist about it, and I can’t comment on the ’cause and effect’ of it all, but ‘The Mistake of 1937’ (the Fed’s disruptively early raising of IR from near zero after the depression years) was followed by WWII. Can MB do an article on the lessons we can learn now from the Mistake of 1937?

      • two things:
        – WWII was not started by US; in fact US was very anti-war even when it started
        – do you think low rates would be able to lift US out of depression without stimulus called WWII – equal to 37% of GDP in 1945 and with total cost of or almost $2 trillion ($30 trillion in today’s dollars)?

  2. Not being an economist, I look at the things from a different perspective.
    This seems to me as more of a justification of a decision not to raise the rates “for the greater cause” and mostly for domestic politics.
    This way no one bothers to question data on economic upturn in (still) the largest economy on the earth.

  3. @DrX I agree we are hitting real constraints .. but in answer to your question about what could do it – a disruption to energy cost. Currently oil will struggle to break $60 per barrel. Renewables keep dropping. It’s now cheaper (based on whole of life costs) to build solar power stations than coal. The IT revolution is now making many business workflows cheaper and more efficient – but displacing such a large number of workers it will be hard to keep employment up. It’s a double-edged sword. The climate change drivers of the Syrian conflict suggest we are reaching new levels of political volatility too. I’m not quite as negative, but you have a case.

  4. Josh MoorreesMEMBER

    The fed has never been about the economy just the stock market. As has been pointed out by many though they are never going to be able to remove the punch bowl at this point. Until there is some sort of revolution in the US to restore democracy away from the current plutocracy there won’t be any change. It’s not like Janet is elected.

  5. The U.S rates should only be concerned with the U.S economy and with record low unemployment rates there is no need for ridiculously ultra-low rates. “Such a decision could yield a “shock” and a new crisis in emerging markets” – If such a crisis emerges, it will be because of the long standing ultra-low rates policy. I don’t see how stalling on this decision will help it. Indeed, it is more likely to make the repercussions worse which they will have to face up to at some point whether they like it or not.

    The IMF should also recognise that the U.S does not operate in a vaccum. If the U.S does not take action, the EU and China will be forced to continue the round of currency wars which does nothing except continue to encourage stupid investing. Everyone knows U.S money is too cheap, and in response everyone else decides to engage in currency wars which defeats the purpose of flooding the market with cheap money.