IMF: Fed rush could hurt US economy

The International Monetary Fund warned the Federal Reserve Tuesday it could stall out the U.S. economy if it raises interest rates too quickly.

The global organization argued in a new report that the central U.S. bank should wait for stronger signs of inflation before boosting rates for the first time since the 2008 financial crisis. Acting too quickly could hurt the economy and force the Fed to lower rates to deal with the damage, hurting the institution’s credibility and undermining its goal of returning to regular monetary policy, the IMF cautioned.

{mosads}The new report made the case for the Fed to wait for a rate hike until 2016, while many Fed watchers are anticipating the central bank will move sometime before the year is out. But the IMF argued that modest growth in the U.S., paired with the threat of a strengthening dollar and renewed economic risks growing abroad, makes a cautious approach the right one.

“There is a strong case for waiting to raise rates until there are more tangible signs of wage or price inflation than are currently evident,” the group said. “Deferring rate increases and proceeding gradually thereafter would provide valuable insurance against the risks from disinflation, policy reversal, and ending back at a zero fed funds rate.”

The IMF’s stance puts it squarely at odds with Republicans in the U.S., who have been pushing the Fed for years to raise rates and return to more typical monetary policy conditions.

The group did note that keeping rates low carries some risk. For example, near-zero interest rates could boost financial instability as investors seek out riskier investments in a search for better returns.

Tuesday’s report is not the first time the IMF has pushed the Fed be cautious about raising interest rates. The group made the case for waiting until 2016 in its annual review in June.

Fed Chairwoman Janet Yellen has maintained that the U.S. economy is growing slowly but steadily, and if the data keeps up, the central bank could be prepared to raise rates sometime in the upcoming months. But all the while, she has maintained that the Fed will be absorbing all incoming economic data to inform its decision, and is not on a preset course when it comes to rates.

In addition to pushing the Fed, the IMF also said in its report that it expects the U.S. economy to grow by 2.5 percent in 2015, shrugging off a first quarter that showed no growth. And in 2016, the IMF is expecting the U.S. to reach a 3 percent growth rate, but future growth could be limited.

The IMF said the U.S. will need to find a way to boost productivity, increase innovation and capital formation and increase participation in the labor force to find additional growth.