Overseas Outlook May Delay Interest Rate Increase

A darker growth outlook overseas is likely to push back the U.S. Federal Reserve’s first rate increase in eight years, the World Bank said Tuesday.

“I expect it will prompt the Fed to hold off on an interest rate rise for a little longer than what observers had originally anticipated,” said Kaushik Basu, the bank’s chief economist. The development bank downgraded global growth expectations amid ongoing eurozone troubles and a sharper emerging market slowdown.

Markets currently expect the rate rise to come in the middle of the year, based on a raft of signals from Fed officials.

But Mr. Basu said three factors are likely to change the Fed’s plans.

First, the U.S. recovery is not yet healthy enough. Although employment is improving–jobless claims fell to a 14-year low earlier this month—real wages are relatively stagnant.

Second, the tumble in oil prices is not all good. Consumers in Europe and Japan, both crude importers, should have more cash left over after filling up at the pump to spend, potentially juicing growth. But that may take time to feed through the economy, Mr. Basu said. In the meanwhile, it’s exacerbating deflationary pressures.

“This is no doubt going to feed into the U.S. Fed calculations,” he said. In fact, the Fed has already indicated a growing concern about oil prices.

Third, weaker growth from major trading partners will also weigh on the U.S. recovery, the bank said.

(via WSJ)