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Fed should wait with liftoff to see firm inflation signs: IMF note

Federal Reserve Board Chair Janet Yellen arrives to testify before the House Financial Services Committee on the "Federal Reserve's Supervision and Regulation of the Financial System" in Washington November 4, 2015. REUTERS/Gary Cameron

WASHINGTON (Reuters) - The U.S. Federal Reserve should wait to see firm signs of rising inflation as well as a stronger labor market before hiking benchmark interest rates, an International Monetary Fund paper said on Thursday.

In a report prepared for the upcoming Group of 20 meeting in Turkey, IMF staff said spare economic capacity and very low inflation justified keeping monetary policy loose in most major advanced economies.

The contrast between rising U.S. rates and probable further easing in other developed countries was one risk overshadowing the global outlook, along with a shift in gears in China and an end to the commodities super cycle, the surveillance note said.

"The Federal Open Market Committee’s (FOMC) decision should

remain data-dependent, with the first increase in the federal funds rate waiting until continued strength in the labor market is accompanied by firm signs of inflation rising steadily toward the Federal Reserve’s 2 percent medium-term inflation objective," said the note, which does not necessarily reflect the views of the Fund's executive board.

A Reuters poll published on Tuesday showed a 70 percent chance the U.S. central bank would raise its short-term lending rate at its Dec. 15-16 meeting, after a stronger-than-expected jobs report last week.

Policymakers, who have held benchmark overnight rates in a zero to 0.25 percent range since December 2008, are split over whether inflation is likely to rise from the current 1.3 percent under their preferred measure, which excludes food and energy.

IMF staff urged G20 nations to back China's efforts to liberalize its economy and accept that the transition to slower but more sustainable growth would likely involve some hiccups.

G20 leaders will have an in-depth discussion about migration at their Nov. 15-16 summit, and the IMF note said this was a pressing economic issue for both sending and receiving countries.

Increasing violence in the Middle East and Africa has driven waves of migrants into Europe, but neighboring countries such as Lebanon, Pakistan and Turkey are also struggling to cope with an influx of displaced people and need international support.

Upcoming IMF research showed that the costs associated with asylum seekers in the European Union could rise by a cumulative 0.15 percent of gross domestic product (GDP) in 2015–16 from 2014, the note said.

But since 80 percent of migrants were of working age, continued migration could offset population aging and cut age-related spending in advanced economies by 1 percent of GDP by 2050.

The note suggested host countries could increase the economic contribution from migrants by offering benefits such as permanent residence to those with in-demand skills.

(Reporting by Krista Hughes; Editing by Ken Wills)