IMF Recommends Fed Officials Rethink Plans To Raise Interest Rates
RENEE MONTAGNE, HOST:
Next, we look at the state of the U.S. economy. We start with the head of the International Monetary Fund, Christine Lagarde. The IMF gave its annual review of the U.S. economy yesterday and, as it always does, offered some advice. One big takeaway - the Federal Reserve, Lagarde said, should postpone its plan to raise the benchmark interest rate until at least next year. Just after that meeting, we reached Christine Lagarde at IMF headquarters. Good morning.
CHRISTINE LAGARDE: Good morning.
MONTAGNE: Now you and the IMF advise economies around the world. So I'd like to ask you first, what is your outlook for the U.S. economy?
LAGARDE: The outlook by the IMF of the U.S. economy is rather positive, yet we have revised downward our forecast for 2015 to 2.5 percent. And this revision downward is caused by the very bad first quarter, which was itself caused by a combination of bad weather, port strikes on the West Coast and much slower investment in the energy sector. But we believe that in the coming quarters, the annualized rate should be in the 3 percent, which is good.
MONTAGNE: Speaking about interest rates, why would you want to postpone them? I mean, what would a rise in interest rates do if it was, in your opinion, too fast?
LAGARDE: The risk, if the interest rate is raised too fast, is that it operates as a break on growth and that inflation rate could go down. So what we're saying is to avoid that risk, it is probably better to wait a little bit, such as early 2016, even if it is to the risk of having slightly higher than 2 percent inflation as a result of having waited. We believe that if we trade off between this inflation or slightly over 2 percent inflation, the U.S. economy will be better off on the side of slightly-higher inflation.
MONTAGNE: You know, perhaps surprising to many, I gather you're recommending also against too much focus on reducing America's debt and deficit, saying that that could be damaging. Your reasoning is what?
LAGARDE: The United States needs to have a medium-term fiscal policy that is aiming at reducing the long-term debt. In the immediate short-term, there is no great risk of increase of that U.S. debt. Then in the short-term, some measures can be taken in order to sustain growth, in order to encourage growth by way of infrastructure investment, for instance. We also believe that investment in education and job stimulation by way of vocational training, for instance, would be helpful. But we are linking the two together. Medium-term policies have to be identified, articulated and agreed. And if that is the case, short-term fiscal measures can be put in place to encourage and support growth, such as investment and infrastructure.
MONTAGNE: I understand you also have some advice for Janet Yellen, head of America's Federal Reserve, on the question of press conferences, suggesting that she give twice as many press conferences as she does now, at every meeting rather than quarterly. Why would that be helpful?
LAGARDE: We made that recommendation to Chairman Yellen last year that there be probably more communication and press conferences on a more regular basis. I personally sympathize with her to regard this exercise as sometimes a bit cumbersome. But equally, we know that in an environment where central banks have adopted unconventional monetary policies, are navigating in uncharted territories and are going to have to pull back from where they have been, explaining it as much as possible, detailing the data on which decisions are made, giving enough anticipation to those outside of the United States who will be affected by possible volatility movements arising out of the change of monetary policies would help.
MONTAGNE: Christine Lagarde is managing director of the International Monetary Fund. Thank you very much for joining us.
LAGARDE: Thank you.
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