As the world is patiently awaiting the news of when the US Federal Reserve will increase interest rates from their historically low levels, a warning has come from the International Monetary Fund (IMF). According to the body, there may be significant negative impacts on global markets from the Fed’s potential interest rate hike.
"The risk is once market sentiment shifts - possibly triggered by normalisation - yields could sharply increase and capital flows could reverse," said IMF’s Deputy Managing Director Mitsuhiro Furusawa on Monday. Speaking at an international conference, Furusawa said that this process could become disorderly, with impaired liquidity in certain markets or asset classes.
Although timing of Fed’s rate hike remains a big question, a significant amount of analysts expect the Fed to start increasing interest rates before the end of this year, marking the first rate hike since 2006.
There are concerns that higher US policy rates could result in significant market volatility with consequences to financial stability spilling beyond the borders of the US, especially in emerging markets.
The IMF has warned the Fed to wait to see more tangible signs of wage or price inflation before conducting a rate hike. IMF economists believe inflation in the US will not reach the Fed’s 2 percent target until 2017. Raising rates too soon could trigger a greater-than-expected tightening of financial conditions or cause financial instability, weighing down the anticipated growth for 2015 now projected at 2.5 percent, according to the IMF.