World Bank Joins IMF in Urging Fed to Delay Rate Rise Until 2016

The World Bank joined the IMF in urging the Federal Reserve to hold off raising rates until next year, citing an uneven U.S. recovery and the risks to emerging markets of tightening policy any sooner.

“My concern is that the signals coming out of the U.S. economy have been mixed,” World Bank Chief Economist Kaushik Basu told reporters Wednesday in Washington on a conference call to discuss the bank’s semiannual global economic forecasts.

A premature move by the Fed could cause the dollar to strengthen, which may slow the U.S. economy and sideswipe emerging and developing countries, he said.

The Washington-based development bank lowered its forecast for U.S. growth this year to 2.7 percent, from 3.2 percent in January. The bank also expects the U.S. to expand at a 2.8 percent pace next year, down from 3 percent in January.

The International Monetary Fund issued a similar warning last week, urging the Fed to delay raising rates until next year unless growth and inflation pick up more than expected.

Fed Chair Janet Yellen on May 22 said she still expects to increase interest rates in 2015 if the economy meets her forecasts. Policy makers, who next gather on June 16-17, will probably raise rates twice this year starting in September, according to economists surveyed by Bloomberg News.

The Fed, which hasn’t increased rates since 2006, will need to see continued improvement in the labor market and be “reasonably confident” that inflation will move back to its 2 percent target before it decides to act, Yellen said.

Stronger Hiring

The World Bank’s Basu also said he expects the Fed to begin raising rates this year, despite his recommendation.

Investors have moved up their expectations for a rate increase after data showed U.S. employers added more jobs than forecast in May, and interest-rate futures now imply a 53 percent probability of a September rise.

The World Bank also cut its forecast for the global economy to 2.8 percent growth this year, from 3 percent estimated in January.

It expects the euro area to grow 1.5 percent in 2015, up from a January estimate of 1.1 percent. Japan will grow 1.1 percent, compared with a projection of 1.2 percent at the start of the year.

For developing countries, the World Bank trimmed its 2015 forecast to 4.4 percent, down 0.4 percentage point from January. The lender kept its 2015 China forecast unchanged at 7.1 percent growth.

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