"US Early Rate Hike Needed"… IMF Recommends by End of Next Year

"Growth Rate of 7% This Year · Inflation Increase to Widen"

[Asia Economy New York=Correspondent Baek Jong-min] The International Monetary Fund (IMF) has upgraded its forecast for U.S. economic growth and assessed that an early interest rate hike is necessary to curb inflation.

On the 1st (local time), the IMF, through its annual consultation report with the United States, stated that the U.S. economic growth rate will reach 7% this year and inflation will rise significantly, recommending a rate hike by the end of 2022 or early 2023.

The IMF also advised that the U.S. central bank, the Federal Reserve (Fed), should begin tapering asset purchases in the first half of next year. The IMF conducts annual consultations with member countries and provides policy advice.

The IMF diagnosed that inflation continues to exceed long-term targets due to increased U.S. government spending. It forecasted that with the addition of President Joe Biden’s infrastructure investment plan, the economy will grow further and inflation will rise more.

Photo by Reuters

Kristalina Georgieva, IMF Managing Director, also mentioned in an interview with PBS on the same day that "the U.S. economic growth rate is expected to be the highest since 1984."

The Fed lowered the benchmark interest rate to near zero immediately after the outbreak of COVID-19 and has supported economic recovery by purchasing about $120 billion worth of U.S. Treasury bonds and mortgage-backed securities (MBS) monthly.

However, the IMF expressed concerns about potential turmoil during the rate hike process, advising that "skillful communication under a limited timetable will be necessary." This is interpreted as a warning against a tightening shock that could occur amid the Fed’s rate hikes and tapering.

The U.S. government and the Fed maintain that the inflation rise is temporary. The Fed officials’ dot plot already signals rate hikes in 2023.

Some officials have argued for a rate hike in 2022, but Fed Chair Jerome Powell has drawn a line against early rate hikes. On the same day, the White House also distributed data showing that prices of ice cream, ground beef, lemonade, potato chips, and pork have fallen compared to last year.

In contrast, the IMF predicted that the personal consumption expenditures (PCE) price index, which the Fed considers most important in monetary policy, will rise to 4.3% by the end of the year. The core PCE inflation rate, excluding food and energy, is expected to be 3.7%. The U.S. PCE inflation rate in May was 3.9%.

Although the U.S. government and the Fed consistently claim that inflation is temporary, the IMF forecasts that inflation will rise further.

Bloomberg interpreted this as the IMF expecting U.S. inflation to remain above the Fed’s long-term target (2%) even by the end of next year.

The U.S. Congressional Budget Office (CBO) also raised its GDP growth forecast for this year to 7.4% in its 2021 long-term budget outlook released on the same day. This is double the February forecast (3.7%).

The CBO stated that the federal government’s fiscal deficit for the current fiscal year ending in September (October 2020?September 2021) will reach $3 trillion.

Bloomberg reported that this is similar to last year’s record-high deficit ($3.13 trillion) and is the largest since World War II.

The federal debt-to-GDP ratio is expected to reach 102.7%, the highest since 1945 (106.1%), the final year of World War II.

This content was produced with the assistance of AI translation services.