Fed risks emerging market turmoil with rate hike: World Bank official

A top World Bank official said the Federal Reserve risks “panic and turmoil” in emerging markets if it raises a key interest rate this month, adding to warnings that the central bank should delay a move until volatile global financial markets calm down.

An increase in the so-called federal funds rate also probably would further strengthen the dollar, making U.S. exports more expensive and hurting the U.S. economy, World Bank Chief Economist Kaushik Basu said.

But the effects would be greatest in emerging markets, which already are dealing with volatility caused by concerns over China’s economy and that nation’s recent move to devalue its currency, he told 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,” Basu said. “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.

Fed policymakers meet next week to decide if the U.S. economy is strong enough for an increase in the rate, which has been near zero since late 2008 in an unprecedented attempt to stimulate growth during and after the Great Recession.

Fed Chairwoman Janet L. Yellen has said she expected the central bank would raise the rate this year -- the first hike since 2006. Many analysts had anticipated the hike would come in mid-September mainly because the job market has continued to post solid monthly gains.

The economy added 173,000 net new jobs in August, a figure many economists expect to be revised up. The unemployment rate fell to 5.1% last month, the lowest since 2008.

And on Wednesday, the Labor Department reported that job openings jumped by 8.1% in July to a new all-time high of 5.8 million.

But the recent turmoil in global financial markets has led to concerns that a Fed rate hike could add to the volatility.

Former Treasury Secretary Lawrence H. Summers warned two weeks ago that a rate hike this month would be “a serious mistake” and said Wednesday that the case for a delay had become more compelling as markets have continued to roil.

“Now is the time for the Fed to do what is often hardest for policymakers. Stand still,” he said in a post on his blog.

The recent steep decline in financial markets has reduced inflationary pressures, negating the need for a rate hike right now, Summers said.

The World Bank and the International Monetary Fund warned the Fed in June that it should wait to raise the interest rate until next year.

Worries by both institutions about the effects of a rate hike, particularly on emerging market nations, have increased recently.

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

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