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Fed may have to raise rates in late 2022, says IMF

(Bloomberg) – The Federal Reserve will likely have to start raising interest rates in late 2022 or early 2023, as increased government spending keeps inflation above its long-term average target, according to the Fund. International Monetary Fund (IMF).

The US central bank will likely begin to reduce asset purchases in the first half of 2022, Washington-based fund officials said in a statement following the conclusion of the so-called Article IV consultations, the IMF’s assessment of developments. countries’ economic and financial economy after holding meetings with legislators and public officials.

“Managing this transition — from providing assurances that monetary policy will continue to provide powerful support to the economy to preparing for an eventual reduction in asset purchases and the withdrawal of monetary accommodation — will require skillful communication in a potentially tight time frame.” IMF officials said in the final statement.

The Fed kept interest rates close to zero at its June 15-16 meeting, noting that it will likely leave them at that level until next year to help the US economy recover from COVID-19. Officials envisioned two rate hikes for 2023 and seven of the 18 monetary policy makers want to raise them in 2022, compared to March 4.

Fed Chairman Jerome Powell has said that recent sharp increases in inflation will be largely transitory due to bottlenecks and that expectations are generally where the Fed wants them.

Inflation forecasts

The price index for personal consumption expenditure, which the Fed uses for its inflation target, increased 3.9% in May compared to the previous year, the largest increase since 2008. The IMF expects the increase to be temporary, and that the index peaks at 4.3% and falls to around 2.5% by the end of 2022. This figure remains above the Fed’s long-term average target of 2%.

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At its June meeting, the Federal Open Market Committee (FOMC) raised all of its inflation forecasts through the end of 2023, with officials calling personal consumption spending their preferred measure of inflation. Price pressures will increase by 3.4% in 2021, compared to the March projection of 2.4%. They raised the forecast for 2022 to 2.1%, and to 2.2% for the following year.

Fund staff estimate that the increased US spending proposed by President Joe Biden on the infrastructure-focused American Employment Plan and the Social Spending Plan for American Families would boost gross domestic product growth by a cumulative value of approximately 5.3% between 2022 and 2024.

Lawmakers have released a surge of aid funds in the past 15 months to boost the economy through the $ 1.9 trillion American Rescue Plan passed in March, a $ 900 billion package passed in December, and the Cares Act of $ 2 trillion as of March 2020.

“The unprecedented fiscal and monetary support, combined with the decline in COVID-19 case numbers, should provide a substantial boost to activity in the coming months,” the IMF said. “Savings will be tapped, demand for in-person services will return, and depleted inventories will be rebuilt.”

Original Note: Fed Likely Needs to Raise Rates as Soon as Late 2022, IMF Says

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