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Business News/ News / World/  US entering steady growth pace: IMF
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US entering steady growth pace: IMF

IMF advises US Fed to normalize interest rates at a gradual pace, keeping in mind implications for international spillovers and for financial markets

Photo: BloombergPremium
Photo: Bloomberg

New Delhi: The US is entering a phase of steady growth of over 2.5% for at least four years, the International Monetary Fund (IMF) said on Tuesday, advising the Federal Reserve to normalize interest rates at a gradual pace, keeping in mind its implications for international spillovers and for financial markets.

In its annual Article IV consultation report for the US released on Wednesday, IMF said the US economy had bounced back from its temporary loss of momentum in the first quarter (January-March) due to unfavourable weather, a sharp contraction in oil sector investment and a port strike in the West coast. It is set to grow at 2.5% in 2015, up from 2.4% a year ago.

IMF said a solid labour market, accommodative financial conditions, cheaper oil and a shrinking gap between actual and potential output will see the economy reach its growth potential of 2.7% in 2017 before starting to slow down to 2% by 2020.

On the pace and timing of a Fed rate hike, IMF said interest rate increases should remain data-dependent, considering a broad range of indicators and carefully weighing the trade-offs involved.

“The Federal Open Market Committee should defer its first increase in policy rates until there are greater signs of wage or price inflation than are currently evident. Based on staff’s macroeconomic forecast, and barring upside surprises to growth and inflation, this would imply a gradual path of policy rate increases starting in the first half of 2016," it added.

Reserve Bank of India governor Raghuram Rajan has been the most vocal on the need for developed market central banks to consider international spillovers in their monetary policy decisions. “....while exiting from unconventional monetary policies, central banks would pay attention to conditions in emerging markets (in) deciding the timing of their moves, while keeping the overall direction of the moves tied to domestic conditions," Rajan said in a speech at the Brookings Institution in the US in April 2014, while arguing for greater coordination in international monetary policy.

In June, Fed chair Janet Yellen responded to those concerns, saying the Fed is mindful of international spillovers, but can do little to prevent volatility.

Noting the recent volatility in the rupee, Rajan in the biannual Financial Stability Report released last month said: “What we have seen might be only one of a series of such ‘tantrums’ that the global financial markets are likely to witness. Hence even as efforts continue on building a consensus around the need for greater degree of coordination among policy makers across the globe, there is a need to be vigilant about the spillovers."

However, the report maintained India is better prepared to deal with any volatility now, given its record foreign exchange reserves of $355 billion.

Care Ratings chief economist Madan Sabnavis said until the European Union crisis is resolved to everybody’s satisfaction, it is unlikely that the Fed will raise interest rates. “The US dollar has been strengthening against the euro, making US exports uncompetitive. Unless the euro stabilizes, it is unlikely that the Fed will raise interest rates any time soon," he said.

State Bank of India chief economist Soumya Kanti Ghosh said other external factors remaining constant, robust growth in the US will have a positive impact on the Indian economy, especially through a boost in Indian exports. However, Ghosh said there could be unexpected developments such as a possible default by Puerto Rico where US debt funds have invested around $75 billion, which could have an impact on global and Indian growth.

Ghosh said if the Fed rate hike happens by the year-end, it will mostly be because of non-economic reasons as it may not want to push a rate hike to the presidential election year of 2016.

IMF said though the US growth outlook looks robust, pockets of financial vulnerabilities are emerging, putting a premium on improving the resilience of the financial system.

“An important risk to growth is a further US dollar appreciation. The real appreciation of the currency has been rapid, reflecting cyclical growth divergences, different trajectories for monetary policies among the systemically important economies, and a portfolio shift toward US dollar assets," IMF said.

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Published: 08 Jul 2015, 01:01 AM IST
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