GLOBAL lender, the International Monetary Fund, IMF on Thursday slashed the 2015 economic growth projection of the United States (US) to 2.5 percent from its 3.1 percent last estimate in April, calling for the Federal Reserve to hold off its first rate increase in nearly a decade until 2016.
“The U.S. economy’s momentum in the first quarter was derailed by unfavourable weather, a sharp contraction in oil sector investment, the West Coast port strike, and the effects of the stronger dollar,” the IMF’s latest annual review of the US economy said.
The IMF says these developments represent a temporary drag but not a long-lasting brake on growth. “A solid labour market, accommodative financial conditions, and cheaper oil should support a more dynamic path for the remainder of the year,” the Fund added.
According to the global lender, all the above when combined with dollar appreciation, falling global prices of tradable goods, and cheaper energy costs, core PCE inflation is expected to fall in the coming months, to 1.2 percent by end-September. “Inflation should start rising later in the year but reach the Federal Reserve’s 2 percent medium-term objective only by mid 2017,’ the report noted.
The IMF says regardless of the when the Fed increases rates, it warned that the increase could result in a significant and abrupt rebalancing of international portfolios with market volatility and financial stability consequences that go well beyond U.S. borders.
“Alternatively, even without policy changes, higher inflation numbers unaccompanied by better activity data could lead to a sudden upward shift in the yield curve or risk spreads. In either case, asset price volatility could last more than just a few days and have larger-than-anticipated negative effects on financial conditions, growth, labour markets, and inflation outcomes. Spillovers to economies with close trade and financial linkages could be substantial,’ the IMF said.

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