“DOUBLE-EDGED SWORD”
The IMF’s new US forecast follows recent data which indicates a resilient economy in spite of an aggressive campaign of interest-rate hikes to counter high inflation by the US Federal Reserve, and recent stresses in the banking sector.
Addressing inflation, Georgieva said that resilient demand and a strong labour market had been “something of a double-edged sword” for the US economy.
“They have been certainly a boost to American families, but they have also contributed to more persistent inflation than had been anticipated,” she said.
The IMF now expects inflation to remain stubbornly above-target into 2025.
As a result, Georgieva said, the Fed’s job of raising interest rates “is not quite yet done”.
Interest rates “will need to be somewhat higher for longer”, if the Fed is to successfully bring inflation back down to its long-term target of 2 per cent, she said.
The IMF’s forecast indicates that the Fed’s benchmark lending rate needs to rise by at least another 25 basis points to finish the year at 5.4 per cent, and then stay there well into next year.
The Fed funds rate will be just under its current range of between 5 per cent and 5.25 per cent, the IMF predicted.
The Fed’s most recent projections from March see the interest rate staying at its current rate this year, before falling to 4.3 per cent in 2024.
While analysts remain divided on the likelihood of an interest-rate hike at the Fed’s next meeting from Jun 13 to Jun 14, futures traders now assign a roughly 67 per cent chance that the US central bank will vote to do so, according to data from CME Group.
Source: CNA
