IMF urges US Fed to delay interest rate hike until 2016

US Mission Chief Nigel Chalk (left), IMF Managing Director Christine Lagarde (centre) and Western Hemisphere Director Alejandro Werner at a press conference at IMF Headquarters in Washington, DC, on June 4, 2015. -- PHOTO: AFP 
US Mission Chief Nigel Chalk (left), IMF Managing Director Christine Lagarde (centre) and Western Hemisphere Director Alejandro Werner at a press conference at IMF Headquarters in Washington, DC, on June 4, 2015. -- PHOTO: AFP 

WASHINGTON (BLOOMBERG) - The International Monetary Fund waded into the debate over when the Federal Reserve should raise interest rates, calling on the central bank to wait until the first half of 2016 and cutting its U.S. growth forecast for the second time this year.

The lender also said that the dollar was "moderately overvalued" and a further marked appreciation would be "harmful", in a statement released in Washington on Thursday on its annual checkup of the U.S. economy.

"We still believe that the underpinnings for continued expansion are in place," IMF Managing Director Christine Lagarde said at a press briefing in Washington. "The inflation rate is not progressing at a rate that would warrant, without risk, a rate hike in the next few months."

That means the Fed should wait until early 2016, even if there's a risk of "slight overinflation" relative to the central bank's 2 percent target, Ms Lagarde said.

The lender's call for caution comes as two Fed governors, Daniel Tarullo and Lael Brainard, cast doubt on the strength of the U.S. recovery from a first-quarter contraction. Both officials questioned whether the slump could be written off as the result of temporary effects including harsh winter weather.

Disappointing consumer and business spending this year raise questions about whether the U.S. has "lost momentum in the underlying performance in the economy," Tarullo said Thursday at a conference in New York.

"There is value to watchful waiting while additional data help clarify the economy's underlying momentum," Brainard said on Tuesday in Washington.

A stronger dollar, declining oil investment and a West Coast port strike in the first quarter will pull down U.S. growth to 2.5 per cent this year, said the fund, which previously projected the world's largest economy to expand by 3.1 per cent in 2015. Economists surveyed by Bloomberg also expect U.S. growth of 2.5 per cent this year.

Ms Lagarde also spoke about the debt standoff between Greece and its creditors including the IMF, saying a joint proposal from the creditors this week "has clearly demonstrated significant flexibility."