The head of the IMF said that the Fed should continue to be cautious and not reduce interest rates while the risk of inflation rising again still remains.
In a press conference on June 27, International Monetary Fund (IMF) Managing Director Kristalina Georgieva said that the US Federal Reserve (Fed) should postpone cutting interest rates until at least the end of this year. The US is currently the only G20 economy with higher growth than before the pandemic. However, vibrant growth also means inflation risks.
“We see risks. Therefore, we believe the Fed should keep the benchmark interest rate at its current level, at least until the end of 2024,” said Ms. Georgieva. Interest rates in the US are currently around 5.25-5.5%, maintained since the middle of last year.
Kristalina Georgieva at a conference in Washington in June 2024. Image: CNBC
The IMF forecasts the personal consumption expenditures (PCE) price index to be around 2.5% by the end of this year and reach the Fed’s 2% target by the middle of next year. The PCE is the Fed’s preferred inflation measure. However, the US Federal Reserve forecasts the index to reach 2% by 2026.
Georgieva said that America’s economic strength during the period of Fed interest rate hikes was supported by a solid labor market and good productivity growth. However, the Fed still needs more “clear evidence” that inflation is gradually approaching the 2% target.
However, the IMF remains optimistic about the trajectory of easing inflation in the US, due to signs of a tightening labor market and weakening consumer demand.
“I want to reiterate the lesson we have learned over the past few years, which is that the current time is still uncertain. Unexpected challenges still lie ahead. However, we believe the Fed will overcome this period, with the caution they have always shown over the past year,” Georgieva said.
The core PCE index (excluding food and energy) is expected to rise slightly in May, reaching a three-year low. Investors are closely watching this data to gauge the likelihood of the Fed adjusting interest rates. Financial services firm LSEG said investors expect two rate cuts this year, while the Fed forecasts only one policy adjustment.
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