A message to Janet Yellen.

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The IMF's Unusual Advice to the Fed

Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE and chairman of the President’s Global Development Council, and he was chief executive and co-chief investment officer of Pimco. His books include “The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse.”
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The International Monetary Fund understandably made headlines and moved markets Thursday morning when it said the Federal Reserve should wait until next year to raise interest rates.

It is unusual for the IMF to comment so explicitly and specifically about policies in the U.S., its largest shareholder, the world’s biggest economy and the issuer of the global reserve currency.

Here are the four things you should know about these remarks, which are likely to reverberate for weeks to come:

  1. Even though the statement's content is seen as controversial, it was delivered in a normal and routine context. The remarks were part of the periodic “Article IV” consultation the IMF conducts with its 188 member countries to review recent economic developments, prospects and policy implications. At the conclusion of the data analyses and discussions with the country authorities, IMF staff (and, in the case of the U.S., the fund's management, too) prepares a statement that is included in the reports that are discussed by the institution’s Executive Board and subsequently released to the public.
  2. The content of the IMF commentary was unusual in many ways, but most notably because it was precise about the timing of a particularly sensitive policy measure, and in this case, despite considerable fluidity in U.S. data. It also stood out with its suggestion the Fed could safely temporarily overshoot its inflation target.
  3.  The IMF remarks go against a concerted effort by the Fed to counter the markets’ obsession with the timing of the first salvo in a rate-increase cycle. In what I have called the loosest tightening process in the modern history of central banking, Fed officials have gone out of their way to try to convince markets that timing matters a lot less than the fact that is likely to be a very shallow and conditional rate-increase path that will conclude with a policy interest rate that is below the historical average. By contrast, the IMF has made the timing of the first rate increase a central preoccupation, inadvertently contributing to greater market volatility.
  4.  The unusual IMF action could be motivated by three considerations. First, consistent with its role as a multilateral institution with quasi-universal membership, the fund may be seeking to add more international perspective to Fed policy discussions, including concerns the global economy is too fragile to risk a U.S.-related interest rate shock. Second, and consistent with the relatively tough position the IMF has taken toward the European Union on Greece, the institution may be looking to become more assertive with major shareholders that have erred excessively in using the institution to pursue political objectives. Third, the fund may be eager to show it can be frank with all its members, especially as widely approved reforms to the institution’s voting and representation have been held up by the U.S. Congress.

The market impact of the IMF remarks is sure to lessen as additional U.S. data are released, including Friday's jobs report for May. But the episode is likely to remain fresh in the minds of Western policy officials who aren't used to seeing the Fund be so assertive in public about their own policy issues. If only the IMF's assertiveness could help convince the U.S. Congress to move on long overdue governance reforms that are central to the fund's effectiveness and credibility, and to the health of the global economy. 

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mohamed A. El-Erian at melerian@bloomberg.net

To contact the editor on this story:
Max Berley at mberley@bloomberg.net