IMF Warns of Prolonged High Interest Rates, Urges Fiscal Tightening to Tackle Inflation
IMF Warns of Prolonged High Interest Rates, Urges Fiscal Tightening to Tackle Inflation

By Liam Cosgrove

In a recent statement following its comprehensive assessment of U.S. policies, the International Monetary Fund (IMF) emphasized the need for the United States to maintain higher interest rates for an extended period to curb inflation.

Additionally, the IMF urged Washington to adopt stricter fiscal measures to address the country’s mounting federal debt.

Despite the U.S. economy demonstrating resilience in the face of tighter monetary and fiscal policies, the IMF noted that inflation has proved more persistent than initially anticipated.

The IMF’s evaluation, known as the “Article IV” review, included a growth forecast of 1.7 percent for the entirety of 2023, slightly surpassing the organization’s previous estimate of 1.6 percent in April. On a quarter-to-quarter comparison, output was projected to decline by 1.2 percent in the fourth quarter.

The IMF anticipates that the federal funds rate will reach its peak this year at 5.4 percent, exceeding the nominal 5.25 percent Fed rate, before gradually declining to 4.9 percent by 2024.

“While both core and headline PCE inflation are expected to decrease throughout 2023, they are predicted to remain significantly above the Federal Reserve’s target of 2 percent throughout the next two years,” the IMF’s May 26 statement read.

“With a large share of household and corporate debt contracted at relatively long duration and fixed rates, household consumption and corporate investment have proven less interest-sensitive than in past tightening cycles.”

The international organization warned that, because of these factors, monetary policy may need to get even tighter than today’s already restrictive levels.

“This creates a material risk that the Federal Reserve will have to raise the policy rate by significantly more than is currently expected to return inflation to 2 percent.”

IMF Managing Director Kristalina Georgieva participates in a town hall discussion with civil society organizations at IMF headquarters in Washington on Oct. 10, 2022. (Drew Angerer/Getty Images)

During a May 26 press conference, IMF Managing Director Kristalina Georgieva stressed the urgent need for the U.S. government to address its deficits, particularly by implementing higher tax revenues.

“The sooner we implement this adjustment, the better,” she said. “It is important to note that the fiscal adjustment can be front-loaded, which would assist the Federal Reserve in its efforts to combat inflation.”

Georgieva expressed hope that Washington would find a timely resolution to the ongoing debt ceiling crisis, warning against the dire consequences of a catastrophic default that would further disrupt the global economy.

“The U.S. Treasury market serves as a crucial stabilizing force for the global financial system,” the IMF director said, highlighting the contraction many economies are currently experiencing. “If this anchor is disturbed, the world economy—the vessel that carries us all—will navigate uncertain and turbulent waters.”

She appealed to U.S. lawmakers, urging them to devise an alternative approach to managing debt that eliminates the need for annual debt ceiling brinkmanship.

“Could you please explore different avenues to address this issue?”

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