The International Monetary Fund (IMF) said on Thursday that until there are clearer signs of a sustained recovery, the Federal reserve should defer a much anticipated rate hike to mid 2016.
Christine Lagarde, managing director of the IMF, said the Federal Reserve should wait to see "more tangible signs of wage or price inflation.”
IMF economists believe inflation in the US will not reach the Fed’s 2 percent target until 2017.
The central bank is expected to hike rates for the first time in 9 years, however, if not carefully constructed, "regardless of the timing, higher US policy rates could still result in significant market volatility with financial stability consequences that go well beyond the US borders,” said Lagarde.
Recently, instability has been shadowing the US data while its economy shrank 0.7 percent in the first quarter.
Although many experts predict a rise in interest rates this year, loopholes in the US economy are pushing dates back.
According to the IMF, if rates are hiked too soon, the anticipated growth for 2015 growth “which is now projected at 2.5%," will be weighed down.
“Raising rates too soon could trigger a greater-than-expected tightening of financial conditions or a bout of financial instability, causing the economy to stall. This would likely force the Fed to reverse direction, moving rates back down toward zero with potential costs to credibility,” reported an IMF economist.
A change in the Fed rates not only affects the US economy but also has many global implications.
In response to a rise in interest rates, the dollar could gain too much value. As a result, companies in emerging markets such as Russia and South Africa would be left with a large sum of dollar-denominated debt.
Emerging markets are seen to be highly fragile as they are either near or in recession. Their currency is also either low or weighed down by external factors.