Today, the International Monetary Fund (IMF) called upon the Federal Reserve to delay raising U.S. interest rates until the first half of 2016. The international financial organization also lowered its 2015 forecast for U.S. GDP growth to 2.5%, down from 3.1% previously. The IMF attributed the downgrade to an unusually long and cold winter, the West coast port strike and the stronger U.S. dollar. Further, the IMF predicted that inflation won’t near the Fed’s 2% target rate until mid-2017.
If the Fed were to raise rates too soon, the IMF believes that this could destabilize international financial markets. And for the most part, I believe the IMF is going to get what it wants.
I do not expect the Fed to raise rates anytime soon. The Fed is dealing with wave-after-wave of bad news, including downward payroll revisions, a ballooning trade deficit, slowing retail sales, reluctant consumers and declining industrial production. As evidence of this, the Commerce Department recently revised its estimate for first-quarter GDP to a -0.7% annual pace, lower than its initial estimate of a 0.2% rise. The primary factors were the surging trade gap and lower-than-estimated inventories. These factors will also likely weigh on second-quarter growth. Economists are now expecting the economy to grow at an annual rate of 1% or less in the second quarter.
There is no doubt that disappointing GDP growth is taking a toll, so the data dependent Fed cannot raise key interest rates amidst all this economic uncertainty and negative GDP growth. And then there’s the deflationary environment. If the Fed were to raise rates right now, this would boost the U.S. dollar even more and drive down commodity prices.
As an investor, what do you think?