The International Monetary Fund on Friday urged the Federal Reserve to be cautious on raising rates, warning that tightening too fast could force it to reverse and possibly lose credibility.
In a review of the world's top industrial economies ahead of the November 15-16 G-20 summit in Antalya, Turkey, the IMF said the United States and the global economy face risks tied to the impending rate hike, which would be the first in more than nine years.
The Federal Reserve on Wednesday put off the decision, but pointed to the distinct possibility that it could happen in December.
While a rate rise would represent the Fed's confidence in US economic growth, the IMF warned that it could happen "amid large uncertainty about slack in labor markets, the neutral policy rate and the path for inflation and wages."
It said global financial stability is often in the balance, given that an increase in the Fed's benchmark rates could spark "abrupt" shifts in global investment portfolios and high market volatility.
Domestically, the IMF added, "should financial conditions tighten more than warranted by cyclical conditions, it may become a drag to the recovery, and may force the Fed to reverse direction, with a potential cost in terms of credibility."
And it could also drive the dollar higher, with more negative consequences for US exports.
The IMF had advice for other G-20 economies as it pushed more efforts to right global economic "imbalances," such as excess debt and huge trade surpluses.
It said the United States, Japan, and France, most notably, need strong medium-term plans to cut their debts.
Surplus countries like Germany and the Netherlands can afford to spend more and spur growth at home and across the sagging eurozone.
As for China, the world's second largest economy, the IMF said the country needs to work to prevent "too sharp a slowdown in growth" while advancing structural reforms.
The reforms are crucial "to unleash new sources of growth and rebalance the economy towards consumption over the medium term," it said.
It also urged Beijing to rein in credit growth and slow investment growth to reduce risks in the domestic economy.
"Finding the right mix of reducing vulnerabilities and maintaining growth will be an ongoing challenge," it said.