IMF says risks higher in an early Fed rate hike

An early interest rate hike by the US Federal Reserve would involve higher risks than would waiting a bit longer, the chief economist of the International Monetary Fund told AFP.

“I’m not sure that the risks of acting are gigantic, but they’re certainly higher,” said Maurice Obstfeld, in an interview. “I don’t see huge risks at all to waiting.”

“If for any reasons the Fed had to reverse that first interest rate increase, markets would interpret it as a big deal.”

The Fed has made clear that it could undertake its first rate hike in more than nine years as soon as December, a move it has repeatedly put off as US and global economic growth has remained tepid.

The prospect of the key federal funds rate being lifted from near zero, where it has sat since the end of 2008, has roiled markets as it would mean higher borrowing costs for many governments and businesses around the world, which are already struggling with slower economic growth.

The Fed has not yet decided, and what path it will take will depend on the economic data that comes out before its December 15-16 meeting, Obstfeld acknowledged.

But continued questions about either of the Fed’s key guideposts — employment or inflation — “could justify waiting”, he said.

Meanwhile the Fed’s counterpart in the eurozone should continue on an easing path, he argued.

The European Central Bank “should be following the strategy of expanding asset purchases and lowering the interest rate,” he said.

“Inflation remains weak, unemployment remains high, growth remains low. Any policy options are very welcome.”

COMMENT NOW