Fed urged to delay rate hike

In its annual report on the US economy released on Thursday, the IMF noted that "the underpinnings" for continued growth and job creation in the world's largest economy "remain in place." In recent months, however, momentum had been "sapped by a series of negative shocks," the lender of last resort added, which included a harsh winter and a strong dollar that hurt US exports.

The IMF also said it was cutting its annual growth outlook for the US economy to 2.4 percent, from its April forecast of 3.1 percent, due to the unexpected first-quarter downturn.

In its report, the agency stressed the US Federal Reserve (US Fed) should wait longer before raising its key benchmark interest rate. The central bank is edging toward a rate hike possibly as early as June or July after keeping rates at a historic low of between zero and 0.25 percent since December 2008.

However, the Fund said the US economy would not be ready for it until the first half of 2016. The Fed "should remain data-dependent and defer its first increase in policy rates until there are greater signs of wage or price inflation than are currently evident," the IMF said.

The IMF doesn't see inflation in the US hitting the Fed's 2-percent target until mid-2017. In April, for example, US consumer prices even fell 0.2 percent from a year earlier, largely because of plummeting oil prices.

'Moderately overvalued'

Nevertheless, in a speech last month, Fed Chair Janet Yellen said she expected the US central bank to raise interest rates this year, as she saw the domestic economy on course to bounce back from a sluggish first quarter.

Many economists also speculate that the Fed will start increasing rates this September.

In the report, IMF economists also assessed the US dollar to be "moderately overvalued," thus impacting the country's growth, job creation and inflationary expectations.

Noting that the dollar has risen by 13 percent in real terms over the past one year, the Fund warned that a further marked appreciation of the currency would be harmful.

A stronger dollar could widen the country's trade deficit, as it makes US exports more expensive overseas and foreign imports cheaper in America.

The IMF recommendations came on a day when the US Labor Department revealed that applications for jobless benefits in the country dropped by 8,000 last week to a seasonally adjusted 276,000.

Analysts say the rock-bottom level of applications is a good sign for the broader job market. They also expect the May unemployment rate to remain at 5.4 percent, a seven-year low.

Challenges ahead

But despite improvements in the US labor market, the IMF cited long-term unemployment, subdued labor market participation, and high levels of part-time work in the economy as signs of "remaining employment slack" that needed to be dealt with.

Furthermore, a range of challenges linked to poverty, productivity and the fiscal health of the US economy remain largely unaddressed, it added.

The agency, however, said the US financial system is stronger than it was before the 2008 crisis but warned of "potentially serious" threats to stability.

It expressed concerns about the growth of so-called shadow banks, lightly regulated financial firms that operate outside the traditional banking system.

The IMF also warned that insurance companies have tried to compensate for low interest rates by making riskier investments and could be vulnerable in a financial panic.

sri/uhe (AP, AFP, IMF)