IMF Cuts U.S. 2014 Growth Forecast to 2%
Wall Street Journal
By IAN TALLEY June 16, 2014 2:38 p.m. ET
WASHINGTON—The International Monetary Fund, forecasting that U.S. inflation will sit below the Federal Reserve’s 2% target through 2017, said the central bank should keep its policy rate near zero even longer than investors now expect.
In its annual review of the U.S. economy, the IMF cut its forecast for U.S. economic growth this year by 0.8 percentage point to 2%, citing a harsh winter, a struggling housing market and weak international demand for the country’s products.
The fund maintained its 3% growth outlook for next year, saying a meaningful economic rebound is under way. Still, the IMF said significant slack remains in the economy and U.S. officials must do more to stimulate growth in the near term.
At the same time, the U.S. must cut spending and raise revenue in the long term to avoid public debt overwhelming the country’s finances, the fund said.
The remarks came ahead of a Fed policy meeting this week where officials will consider whether to change or clarify guidance on future rate decisions.
Markets currently expect the Fed to begin raising rates—from near zero where they’ve been since late 2008—in the middle of next year. “We’re not that certain,” IMF Managing Director Christine Lagarde said in a news conference. She pointed to uncertainty over how much unemployment will fall over the next year.
Nigel Chalk, the IMF’s U.S. mission chief, said the fund expects “relatively high unemployment and a lot of slack in the labor market” to persist, and consumer inflation to remain well below target into 2017.
That is why the fund said the U.S. government should boost near-term spending, notably on infrastructure, education, job training and child-care subsidies. Fund economists argue more government stimulus would take the burden off the Fed and reduce the risk that easy-money policies fuel too much risky investing.
Read the IMF report.
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“But, regrettably, political agreement on such an approach remains elusive,” the fund said.
That means the Fed needs to continue to stimulate the economy through its cheap-cash policies, risking fueling instability in financial markets, the IMF said.
Even if inflation were to temporarily rise above the central bank’s target, the IMF said the Fed should be willing to accommodate higher price increases with the economy still well short of full employment.
The fund warned that markets don’t seem to be adequately factoring in “substantive ambiguities” in the economic outlook that could force the Fed to adjust its monetary policies.
“This sets up the risk, even with a successful and well-communicated increase in interest rates, for significant swings in market flows and prices in the months ahead,” the IMF said.
Ms. Lagarde said an earlier rise in interest rates by the Fed could stall the U.S. recovery, harm employment and create “severe consequences” for the global economy.
Given the risks, the IMF also said the Fed needs to bolster its communication. The fund recommended the Fed consider news conferences after every policy meeting, instead of the quarterly conferences the Fed currently holds The IMF also suggested the Fed should provide greater clarity about how it factors financial-stability risks into its decisions.
As part of its review of the U.S. economy, the IMF also weighed in on a host of other controversial topics. Among its recommendations, fund economists said the U.S. should hike the minimum wage to help cut poverty levels and “significantly increase” gasoline taxes to bulk up federal revenues.