The IMF on Tuesday, the FED on Wednesday

The IMF on Tuesday, according to the FT, wants the Fed to maintain its low interest rate policy, as they cut growth forecasts after an apparent downbeat assessment of the economy. The IMF cut its 2014 US economic growth forecast to just 2% from the 2.8% it penciled in April. This comes on the back of the World Bank cutting its forecasts last week, citing a weak start to the year as the economy suffered from the well documented weather effects. Tuesday’s US inflation report, that core inflation has reached the Federal Reserve’s target of 2% may start to pose the Federal Reserve a small problem over how best to handle its ongoing interest rate policy. 

If the IMF and World Bank are correct and economic growth ends up being around 2% for the year and inflation remains at 2% that will lead to the US economy having zero real growth in 2014. One dilemma the Federal Reserve doesn’t want to face is the threat of inflation with no real pick-up in the economy. That outcome will have all the anti QE groups coming out of the woodwork claiming, “I told you so”. 

It is worth pointing out the IMF’s track record at predicting economic growth is mixed. Only recently the Managing Director, Christine Largarde, was forced to admit their assumptions for the UK economy were far too cautious. Economists have a terrible record of being backwards looking when it comes to future forecasting, the market on the other hand is always forward-looking. 

We speculated yesterday after the recent actions of the ECB that this may encourage the Federal Reserve to raise rates before the year-end, possibly in tandem with the UK. In spite of the IMF’s down beat view of the US economy we are not the only ones speculating the Fed may be closer to a rate rise than some anticipate.  

Blackrock, one of the worlds largest fund managers, also believes that despite recent comments from the Fed Chair Janet Yellen to the contrary, the first rate hike may be sooner than expected. It bases its views not on her words but her actions. Blackrock has created the “Yellen Index” using the economic indicators favoured by Janet Yellen, and conclude that monetary tightening is already overdue. Hopefully, we will get a clearer picture at the end of the day at what the Fed’s current thinking is. If the Federal Reserve does indicate later that an interest rate rise may be sooner than the middle of next year some of the recent absent volatility may return. 

UK inflation surprised analysts on Tuesday as the May rate fell to 1.5%. Sterling’s recent strength has probably helped to reduce inflationary. The UK economy would appear to be in a pretty sweet spot at this current time; relatively strong economic growth and subdued inflation. Whether this latest figure will then lead Mark Carney to play down rate rise expectations again time will tell, but why he would want to risk this rosy picture by raising rates too soon, only he will know.

Posted on June 18, 2014 .