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International Monetary Fund (IMF) Managing Director Christine Lagarde is seen in this file photoTOMOHIRO OHSUMI

The International Monetary Fund has made the loudest call yet for the U.S. Federal Reserve to delay raising its interest rates, saying that renewed economic uncertainty and weak inflation argue for keeping rates at their current rock-bottom level until the first half of 2016.

"The U.S. economy remains below potential, wage and price pressures are expected to remain low, and inflation expectations appear well-anchored," the IMF said in a statement in conjunction with the completion of its periodic consultation on the U.S. economy. "There is a strong case for waiting to raise rates until there are more tangible signs of wage or price inflation than are currently evident."

"If data evolve in line with the [IMF's] macroeconomic forecasts, and barring upside surprises to growth or inflation, such a policy would imply keeping the fed funds rate at 0-0.25 per cent into the first half of 2016."

The IMF issued its advice to the Fed at the same time as it slashed its U.S. economic growth forecast for 2015, in light of the economy's contraction in the first quarter, although it characterized the factors that pulled the economy down in the quarter as "temporary." The global financial agency forecast that U.S. gross domestic product growth would be 2.5 per cent in 2015, down from its previous estimate of 3.1 per cent. U.S. GDP grew by 2.4 per cent in 2014.

"What we are seeing in the data … is that the inflation rate is not progressing at a rate that would warrant, without risk, a rate hike in the next few months," Ms. Lagarde said. "The economy would be better off with a rate hike in 2016, when hopefully the inflation numbers have consolidated."

The Fed's key interest rate, the federal funds rate, has been set at its current range of 0 to 0.25 per cent since late 2008, at the height of the financial crisis. Just a few months ago, amid a rapidly improving U.S. labour market, buoyant forecasts for 2015 growth and an anticipated economic lift from sharply lower energy costs, the beginning of Fed rate hikes – a much-anticipated event commonly known as "lift-off" among Fed watchers – was expected as early as this month's meeting of the policy-setting Federal Open Market Committee (FOMC).

The last time the Fed published its so-called "dot plot" graph of rate expectations among FOMC members, in its quarterly projections in March, the majority anticipated at least two rate increases by the end of this year. The median forecast was for a federal funds rate of 0.50 per cent by year end.

But since that March outlook, the economic indicators have shown a deeper first-quarter slowdown than most observers had expected, and the widely anticipated pick-up in consumer demand stemming from energy savings has yet to materialize. The U.S. economy contracted by an annualized rate of 0.7 per cent in the first quarter; the Federal Reserve Bank of Atlanta, part of the Fed system, now projects growth of just 1.1 per cent in the second quarter.

Futures prices suggest that most market participants are still betting on a first rate hike by the FOMC's September meeting. But the unimpressive economic data have raised uncertainty about the underlying strength of the U.S. economy, prompting private forecasters and even some key Fed officials to argue for more time to get a clearer reading before beginning to raise rates.

This week, Chicago Federal Reserve president Charles Evans – one of the more dovish voting members of the FOMC – argued that the U.S. economy won't be ready for a rate increase until the first half of 2016 or possibly even later, and suggested that his FOMC colleagues are in no hurry to begin rate hikes.

"The hurdle is pretty high for raising rates at the moment," he told reporters in Chicago. "There's currently a strong consensus on continued accommodation."

Another voting member, Lael Brainard of the Fed's board of governors, said the economy needs to show more signs of improvement before rate hikes will be appropriate. But she suggested that if labour and inflation data continue to improve, lift-off could occur "before the end of the year."

The FOMC's next policy meeting is June 16-17, at which time it will also release new economic forecasts and update its dot plot rate projections.

Ms. Lagarde said that the Fed would be wiser to hold off longer, even if that means allowing inflation to eventually creep above the Fed's medium-term goal of 2 per cent.

She said the risk of starting rate hikes prematurely – chiefly, that it could trigger financial volatility that could undermine the economic recovery – "is greater than the risk of slightly higher than 2 per cent inflation going forward."

If the Fed were to hold off until well into the first half of 2016, that would align it much closer to the likely timing of the Bank of Canada's own rate hikes. Canada's central bank, which cut its key rate in January by one-quarter point to 0.75 per cent, still projects that the Canadian economy will return to full capacity and 2-per-cent inflation by the end of 2016. If that holds, it would suggest that the bank would begin raising rates around mid-year. However, Canada's own rough start to 2015 could also delay the launch of Canadian rate hikes.

With files from The Wall Street Journal

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