IMF warns Fed on fast rate hike

International Monetary Fund (IMF) states that unexpected Fed rate move could shake up moderately expanding global economy

Updated Jul 28, 2015

‘Moderate’ growth pace of the global market could be disturbed if the US Federal Reserve announces its move to raise interest rate unexpectedly, the International Monetary Fund (IMF) said Wednesday.

The sudden decision made by the US Central Bank to raise interest rates could catch global market off-guard.

The IMF stated that raising short-term interest rates sooner than market anticipation could result in a hasty jump in long-term interest rates and a whirlwind of volatility.

The IMF published main threats to the stability of the global economy citing major risks for funds.

As the financial industry evolves, fluctuating exchange rates and bond markets could become more evident. “Low market liquidity may act as a powerful amplifier of financial risks” said the IMF.

Eurozone and Japan policymakers could promote unstable growth if they rely solely on easy-monetary policies and fail to acknowledge problem loans and repair their economies.

Falling energy costs are benefiting net oil importers such as the US and China. However, oil companies and their creditors are making a loss on their cash-investments in production. Debt repayments are also becoming very difficult for many countries.

Low interest rates initiated by mass central bank easing are extending the search for yield and widening some asset valuations.

If the US dollar continues to increase, borrowing costs will rise harshly and geopolitical risks will become aggravated, emerging markets could also be affected by financial turmoil. Emerging-market firms and governments that borrowed in dollars but hold revenue in largely denominated local currencies, depreciating against the dollar are facing strained finances.

Depending on the recovery of the US economy, the Fed will hike interest rates and in Fed’s recently published Beige Book report, the US is progressing modestly.

The Beige Book is a report of anecdotal information, on business activity collected from 12 federal districts, which comes out every six weeks, described February and March’s performance of the global economy as “modestly” or “moderately” improving.

According to the Beige Book, some sectors of the US economy were negatively affected by the strong dollar, falling oil prices, and tough winter conditions in the first quarter. Nevertheless, recovery is becoming more ostensible.

The last time Fed hiked interest rate was in 2008. Officials are currently contemplating when to begin raising short-term interest rates from near-zero. However, no move is expected this month. Depending on data, many market players are expecting June or the end of the year for possible rate hike.

TRTWorld and agencies