OECD Issues Warning to Fed on Pace of Future Rate Increases

  • Fed should raise rate this week to reduce uncertainty
  • OECD trims global growth outlook on emerging markets

The Organisation for Economic Cooperation and Development said the Federal Reserve would be right to begin raising interest rates this week while warning that uncertainty about the path of tightening poses a greater threat to the economy.

Fed policy makers led by Chair Janet Yellen begin their two-day meeting on Wednesday with economists divided over whether the gathering will conclude with the first U.S. rate increase in almost a decade.

Catherine Mann
Catherine Mann
Photographer: Eric Piermont/AFP via Getty Images

“What we want to emphasize is what matters is not whether they move tomorrow or whether they move in December,” OECD Chief Economist Catherine Mann said in an interview in Paris. “What matters is the path they take after that and how they communicate it.”

Mann spoke as the OECD updated its economic outlook, in which it trimmed its global growth forecast for this year. In a study published alongside the report, the organization said policy makers’ more aggressive rate view -- when compared with investors -- could mean a weaker U.S. economy in two years.

Officials in the Federal Reserve system currently project the Federal Funds Rate will be about 1.6 percent by the end of next year. The policy makers’ view, known as the “dot plot,” would knock 0.4 percent off the size of the U.S. economy in 2017, according to the OECD study.

Market Disconnect

“Which path they take is really going to be key,” Mann said. “The disconnect between the dot path and what the market expects represents a real communications challenge for the Fed.”

For Mann, the U.S. central bank would help to remove uncertainty by making its first move sooner rather than later. The OECD study indicates the timing of the initial move will only take 0.1 percentage points off 2017 GDP.

The spillover from monetary-policy choices made in the world’s largest economy is also being hotly debated at a time when growth in emerging markets is slowing.

“Do it now to remove uncertainty facing emerging markets, but communicate more clearly the nature of the more gradual path, that’s the message,” Mann said.

Global Growth

The OECD expects the global economy to expand 3 percent this year, down from 3.1 percent in June, with stronger U.S. growth making up for slowdowns elsewhere. The 2016 forecast was trimmed to 3.6 percent from 3.8 percent.

“The bulk of the reduction is in emerging markets and in commodity producers,” Mann said. “That’s partly offset by a more robust recovery in the U.S.”

The U.S. will grow 2.4 percent this year and 2.6 percent next year, with the 2015 forecast representing a 0.4 percentage point improvement since June. China’s forecasts were also trimmed slightly, to 6.7 percent and 6.5 percent.

The euro-area projections were largely unchanged, at 1.6 percent this year and 1.9 percent in 2016.

The biggest 2015 downgrades were for Brazil and Canada. Brazil’s economy will shrink 2.8 percent this year, while Canada’s will grow 1.1 percent.

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