World Bank's chief economist: Fed rate hike will trigger 'panic and turmoil' in EM

The Federal Reserve should not increase rates in September now that the world economy is looking so troubled, said Kaushik Basu, the World Bank's chief economist. 

In an interview with the Financial Times, Basu said a rate hike would cause "panic and turmoil" in emerging markets as they still are reeling from the bad news last month of China's surprise devaluation:

“I don’t think the Fed lift-off itself is going to create a major crisis but it will cause some immediate turbulence,” Mr Basu said, adding that it is the compounding effect of the last two weeks of bad news with that China devaluation. 

"In the middle of this it is going to cause some panic and turmoil."

The U.S. central bank has recently given mixed signals about the possibility of a hike this month. While the labor market is continuing to strengthen, policy-makers are worried that inflation will be weighed down by the higher dollar and recent falls in commodity prices.

“There is a worry in emerging economies all around in case China takes a hit,” Mr Basu said. “This is the problem right now in the world."

"Overall we are going to get into a slower global growth phase."

The World Bank's forecast in June of 2.8% growth for the global economy could be trimmed given the slowdown in emerging economies like China and Brazil and developed economies excluding the U.S.