The Fed should wait to move until it sees “clear signs of wage and price inflation,” the IMF said, which is “benign” at the moment. The IMF comments came from its annual report on the U.S. economy and an ensuing press conference.
“We feel there is space for them to wait,” said Nigel Chalk, the IMF’s U.S. mission chief, noting that inflation is far from the Fed’s 2% annual rate target. As measured by the personal consumption expenditure price index, the annual growth in inflation was just 0.2% in May.
The IMF doesn’t see inflation as measured by the Fed’s favorite measure hitting 2% through 2017.Deferring a move would also provide insurance against the risks of disinflation and a reversal of policy, the report said.
There has been a debate on the Fed about whether it is better to hike early and more gradually or move later and potentially faster. The IMF sides with the doves on the U.S. central bank who want to wait to move.
Core inflation is likely to remain flat in coming months and start to rise only toward year-end, the IMF said. There is unlikely to be any spike up in inflation, given the strong dollar DXY, +0.85% , lack of wage dynamism and the scope for firms to absorb cost increases into their profit margins.
A rate hike could push up the dollar, which is already slightly overvalued. Further appreciation of the greenback is “an important risk to growth,” the IMF said.
Much depends on how the financial market reacts to the policy move, the IMF admitted, and the Fed should feel free to hike earlier if there are upside surprises in growth and inflation.
marketwatch.com
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