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Rates push by US Fed would be good news - Lagarde

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IMF chief Christine Lagarde at the panel discussion yesterday. Reuters

IMF chief Christine Lagarde at the panel discussion yesterday. Reuters

REUTERS

IMF chief Christine Lagarde at the panel discussion yesterday. Reuters

The Federal Reserve will probably raise interest rates by the middle of this year in a clear sign of the health of the US economy, IMF chief Christine Lagarde said yesterday.

It was a rare non-European reference at the World Economic Forum, with proceedings largely focused on the quantitative easing announcement from the ECB.

In a discussion on the second full day of the gathering of the world's rich and influential, Ms Lagarde said a rate rise by the Fed would be ''good news'', as it would show that employment in the world's largest economy is rising and inflation is indicating it is moving in the right direction.

"It is good news in itself, but the consequences of that are going to be a different story. There will be spill-over effects and there will be volatility as a result,'' Ms Lagarde said.

"But its clearly a good sign and clearly an indication that the US is growing, that the US is reducing unemployment and that price expectations are on the upside."

But former US Treasury Secretary Larry Summers, who also took part in the discussion, said the Fed shouldn't be fighting against inflation until "it sees the whites of its eyes".

"That is a long way off,'' he said. Mr Summers warned that the world economy was entering treacherous waters, and he warned that nobody has predicted a recession a year in advance. And Gary Cohn, chief operating officer of Goldman Sachs, said he was concerned about the ability of the US in light of the state of the economy in the rest of the world.

"If you look at the strength of the dollar today, it will only get stronger if we raise rates in the United States. That will have a chilling effect on the US economy,'' he said.

And he said there was no sign of wage inflation, with negative wages instead. He also said countries around the world are engaged in a currency war in a bid to boost growth. "'The prevailing view is that the easy way to stimulate economic growth is to have a low currency,'' he said.

Later in the day, as the ECB was making its QE annoucement, German Chancellor Angela Merkel defended Berlin's decision not to free up spending and boost investment, which some had hoped would help boost growth in the Eurozone.

"I know that some people accuse us of being too tight with our money, as regards our budgetary policy. But let me remind you that Germany has a massive demographic challenge as probably no other European country,'' she said.

"More than six million people will be lost to our market who are now gainfully employed because they will retire.

"And if we're not solid in the way that we do our business, and try to keep our debts down, we will leave a very heavy burden to the next generation. They will simply not have the necessary breathing space.'' Ms Merkel also said Europe must become more competitive and less regulated.

Irish Independent