US Federal Reserve should hold on rates if Brexit vote hits growth


12 Jul 2016

US Federal Reserve should hold on rates if Brexit vote hits growth

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AFP Photo/Saul Loeb
AFP Photo/Saul Loeb

AFP Photo/Saul Loeb

The IMF said Tuesday that the Federal Reserve should hold off on raising interest rates if Britain’s vote to break with the European Union results in slower US growth.

In its annual report on the US economy, the International Monetary Fund said it only expects a small Brexit impact on US growth, which it forecasts at a sluggish 2.2 percent this year and picking up in 2017.

“But because of uncertainty about the economic fallout, risks to the outlook appear now as skewed to the downside,” the report said.

“Should downside risks materialize, interest rate increases should be delayed in line with a data-dependent approach.”

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Nigel Chalk, the IMF Western Hemisphere Department deputy director, said the Fund was generally optimistic about the US economy in the near term.

However, he told reporters, “There’s some drag from slower global growth and slower UK growth. There’s still an incredible amount of uncertainty.”

At the beginning of this year, the IMF projected US growth at 2.4 percent, but cut that forecast citing slower global growth overall, the contraction in the energy industry due to low oil prices, and a slowdown in domestic consumer spending.

Asked about whether the sharp downturn in US Treasury bond yields to record lows — often seen as an indication that the market expects growth to stall — Chalk said it was more linked to global factors, including risk-avoidance related to the Brexit vote, than to the prospects for US growth.

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Chalk said that so far the June 23 Brexit referendum has not had great repercussions on the US, noting that the dollar has risen only slightly, and so not overly threatening US exports.

He also said the normal expectations were for a selloff in US and global equities, but the reverse has happened, with the S&P 500, a key barometer of US stock activity, hitting a record high on Monday.

“On the whole… financial conditions if anything are a little looser now than they were before the referendum largely due to the decline in yields.”

With lower bond yields making it cheaper for companies and consumers to borrow, he said, “We think that should actually help support the US economy.”

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“So the net effect on growth is pretty negligible,” he added.

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News Source: TheGuardianNigeria, 9jaTales

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