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IMF, Downgrading U.S. Growth Outlook, Cautions Investors About Interest Rates

June 16, 2014 by  

WASHINGTON (MCT) — The International Monetary Fund on Monday sharply lowered its U.S. growth projection for the year and issued a cautionary note to investors: Don’t be too confident about interest rates.

Like others in the economic forecasting business, the IMF downgraded its U.S. outlook after first-quarter activity was hammered by the harsh winter weather. Averaging that poor start, the fund now estimates the American economy to grow a modest 2 percent this year, down from its April projection of 2.8 percent.

The IMF’s managing director, Christine Lagarde, stressed that the weakness was temporary and that the U.S. economy was now gaining momentum. (One latest sign of that was the strong report Monday on American industrial production.) The IMF left unchanged its forecast for 3 percent growth in 2015.

At the same time, the IMF is more cautious than many others about the longer-term prospects. Looking further out into the future, the international lender of last resort sees U.S. growth averaging 2 percent a year, compared with 3 percent in prior decades, largely the result of slower labor force and productivity gains.

The Nation won’t return to full employment of close to 5 percent (from 6.3 percent currently) until the end of 2017, the IMF predicted, and inflation is likely to remain below the Federal Reserve’s 2 percent target for some time.

In this scenario, Lagarde said, the Fed’s benchmark interest rate could stay near zero for longer than the mid-2015 date widely expected by financial markets. The economic outlook, particularly the labor market, is fraught with uncertainty, she said in a news conference in Washington, yet there is a lot of certainty in financial markets about the Fed’s interest rate policy.

Fed officials will be updating their economic, unemployment and inflation projections when they meet Tuesday and Wednesday for their regular policy meeting. Policymakers are expected to announce further cuts in their bond-buying stimulus program and to maintain their guidance to markets that the central bank would likely start raising interest rates around the middle of next year.

Like Lagarde, Fed Chair Janet L. Yellen has expressed concerns about the large numbers of long-term unemployed and other weaknesses in the labor market not captured in the jobless rate. And Yellen and her colleagues will be weighing these and other economic indicators as they deliberate on what signals they want to give to investors on Wednesday.

Lagarde also urged Yellen to consider holding more news conferences to explain Fed policy and thinking. Since 2011, the Fed leader has set a pattern of meeting with reporters every quarter when economic forecasts are updated. The Fed’s schedule for this year also calls for four news conferences, including one Wednesday.

–Don Lee
Tribune Washington Bureau

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(c)2014 Tribune Co.

Visit Tribune Co. at www.latimes.com.

Distributed by MCT Information Services.

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