OECD: America risks a crisis unless it raises interest rates
Interest rates should be lifted to 1pc by the end of the year from their current band of between 0pc and 0.25pc, according to the latest semi-annual outlook from the Organisation for Economic Co-operation and Development (OECD).
Doing so would avoid the Federal Reserve having to raise rates more quickly later to counter inflation, according to the think-tank’s economists.
The twin policy prescription comes as the US central bank prepares to end its second, $600bn (£369bn) of quantitative easing (QE) next month. Although Ben Bernanke, the Fed chairman, has said a third shot of QE is unlikely, he has also signalled he is in no hurry to raise the target for the federal funds rate – the economy’s key lending rate.
The latest set of forecasts from the OECD have the world’s largest economy growing 2.6pc this year – stronger than its last prediction in November but considerably weaker than the Fed’s own expectations.
And while the Paris-based group predicts the US unemployment rate will decline to 7.5pc by the end of next year from its current level of 9pc, that remains far above the level before the crisis.
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The OECD, meanwhile, was blunt in its criticism of politicians in Washington DC for their failure to deliver a plan to reduce America’s budget deficit, which is forecast to reach 9.8pc of gross domestic product this year, according to the Congressional Budget Office.
“A well articulated medium-term strategy aimed at putting general government finances on a sustainable path also needs to be agreed as a matter of urgency,” the OECD said in its report.
It also said that the Bank of England should raise interest rates before the end of the year or risk letting inflation run out of control.
Despite downgrading its growth forecast for the UK for the third time in six months, it said: “Normalisation of interest rates will need to start during 2011 to stave off significant increases in inflation expectations.” Inflation is running at 4.5pc, more than double the Bank’s 2pc target, but has so far showed little sign of becoming embedded in wage settlements.