the report

In its annual review of the US economy, the IMF has included a request that the Fed postpone raising rates until the first half of 2016  (I’ve searched without success for the 10-page analysis on the IMF website, so I’m relying on the FT and Bloomberg for my information.)

To start with the obvious, this can’t be the first discussion of the idea of pushing back rate hikes between the IMF–dominated by EU interests–and the Fed.  The release isn’t the act of some nerdy economist (is there any other kind?) tacking the request on to a report that the top figures in the IMF didn’t review.

No, this is the IMF going on record as saying  it thinks the Fed beginning to normalize rates this year is a bad idea   …and that its request for delay has been rebuffed by the Fed.

the rationale

Its rationale seems to be that higher short-term interest rates might cause a sharp contraction in credit availability in the US and a consequent inadvertent loss in domestic economic growth momentum.  Given that the EU is counting on reasonable demand in the US for its exports, the follow-of effect of the US stalling might be disappearance of green shoots of recovery in the EU as well.

Higher rates might also cause the US dollar to rise.  While a stronger currency would slow the US economy further, it would also increase the attractiveness of foreign goods and services (including vacations) vs. domestic.  The latter factor would be an overall plus for the EU.  Companies would be the main beneficiaries, however.  Ordinary consumers would be hurt through a rise in the price of dollar-denominated goods like food and fuel.

the response

The consensus view in the US, I think, is that:

–official statistics understate the strength of the US economy,

–seven years of intensive-care-low interest rates in the US is long enough,

–a rise of .25% or .50% in rates would have no negative effect

–it might also be a positive, in the sense that the Fed would be signalling that the economy can at least partially fend for itself.

In short, the view is that prolonging anticipatory anxiety is far worse than raising rates a tiny bit and seeing what happens.

The EU economy, on the other hand, is maybe two years behind the US in absorbing the negative effects of the near collapse of the financial sector.  Instead of flooding the area with money–the US approach–it has relied on collective austerity to heal itself.   Sort of like leeching vs. antibiotics.

So the EU has less ability to deal with the negative effects of a US slowdown than the US itself has.  Dollar strength would be another blow to an already beaten-down EU consumer, fueling further politically disruptive far right sentiment, which to me already looks pretty ugly.

In the Greenspan era, the US would probably have accommodated the EU.  Post-Greenspan Fed chairs have made it clear, in contrast, that US interests come first.  The IMF comments reinforce that this is still the case.