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World bankers message to Fed: ‘Don’t hike rates until 2016’

Add the World Bank to the list of influential organizations that are warning the Federal Reserve not to start hiking interest rates until next year, citing the risk of extreme market volatility. The World Bank, in its twice-yearly report, Wednesday not only slashed its global growth estimate to 2.8% from 3%, it also implored the Janet Yellen-led Fed to hold off on rate increases until next year to avoid creating a replay of the so-called “taper tantrum” from the summer of 2013. Two summers ago financial markets suffered steep losses after the U.S. central bank first hinted at winding down its bond-buying program, known as QE.130130035540-federal-reserve-building-monster

Last week, the International Monetary Fund issued a similar warning to the Fed. The Fed has hinted that it is leaning toward hiking rates later this year, and Wall Street expects a move as early as September. The threat of short-term rate hikes, coupled with improving economic data in the U.S. and abroad, has pushed the yield on the 10-year Treasury note up close to 2.5%, its highest level since September 2014.

Kaushik Basu, the World Bank’s chief economist, advised the Fed to hold off until 2016, saying a premature rate hike in the U.S. would exacerbate volatility in the world’s currency markets and hurt the global economic recovery. Basu also said investors should brace for wild rides in markets if the Fed moves too soon. “We at the World Bank have just switched on the seat belt sign,” Basu said in a press conference yesterday in Washington, according to a Reuters report. “We are advising nations, especially emerging economies, to fasten their seat belts.”

Basu expressed his personal view that the Fed should rethink its plans to start raising rates in 2015. “If I were advising the U.S. Fed, I would recommend that (higher rates) happen next year instead of late this year,” due to the mixed economic picture, Basu said at the press conference.  “My own concern,” Basu added, “is that a relatively early move (in U.S. rates) could cause an exchange rate movement, strengthening of the dollar, which will not be good for the U.S. economy” and have negative repercussions for other countries, he said.


February 2018
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