World bank chief economist warns US rate rise risks ‘panic and turmoil’

World bank chief economist Kaushik Basu has warned that a sudden interest rate rise in the US will cause “panic and turmoil”. 

The central banker said that the ongoing uncertainty and volatility around China’s stockmarkets means the Fed should wait until markets are calmer, when speaking to the Financial Times.

“I don’t think the Fed lift-off itself is going to create a major crisis but it will cause some immediate turbulence,” says Basu. “It is the compounding effect of the last two weeks of bad news. In the middle of this, it is going to cause some panic and turmoil.”

“The world economy is looking so troubled that if the US goes in for a very quick move in the middle of this, I feel it is going to affect countries quite badly,” Basu said.

His comments follow those from former Treasury secretary Larry Summers who urged the Fed to hold off any rate rises. 

In a blog post, he said a decision to raise rates in September would be a “serious mistake”. 

“Having followed the debate among economists, Fed governors and bank presidents I believe the case against a rate increase has become somewhat more compelling even than it looked two weeks ago,” he said.

His argument includes the comment that the data coming out of the US is not compelling enough to raise rates, adding that there is “a slowing in the US and global economies and reduced inflationary pressures”. 

Some believe the Fed will just raise rates by 25 basis points in September and then make no further shift for a number of months. But Summers says this argument is incorrect.

“Arguments that the Fed can safely raise rates by 25 [basis points] as long as it’s clear that there is no commitment to a series of hikes are specious. If as some suggest a 25 [basis points] increase won’t affect the economy much at all, what is the case for an increase?”

“In a highly uncertain world, the Fed cannot be both data dependent and predictable with respect to its future actions. Much better that it stick with data dependence than that it put its credibility at risk by seeking to mitigate a current rash action by trying to reassure with respect to future steps,” he adds.

The market has priced in a 50 per cent chance of a rate hike in September, says Summers. The Fed meets on 16th and 17th September.