To the International Monetary Fund (IMF), low inflation or deflationary pressure seems to be a tough task for every economy, thus it suggested that the U.S. Federal Reserve raise the interest rate a little bit later, an IMF senior official said.
“As long as they (labor market slack) are still there, we don’t think there will be big inflationary pressure,” Nigel Chalk, deputy director of the IMF’s Western Hemisphere Department and the U.S. mission chief, told Xinhua in a recent interview.
The IMF still sees a significant slack in the U.S. labor market, such as long-term unemployment, subdued participation and high levels of part-time work.
The IMF on Thursday cut the U.S. economic growth forecast for 2015 down to 2.5 percent and called on the Fed to delay its first interest rate hike until the first half of 2016, arguing the current inflation rate in the United States does not warrant a rate hike without risks in the next few months.
This suggestion points to the IMF’s concern about low inflation or disinflationary pressure on the global economy, as deflation proved to be tough to deal with compared with inflationary pressure.
Dollar appreciation and global deflationary or disinflationary trends all weigh on the U.S. inflation level, Chalk said.
The IMF expected the core Personal Consumption Expenditure (PCE) price index, an inflation gauge preferred by the Fed, to fall in the coming months. It anticipated inflation would start rising later in the year but reach the Fed’s 2-percent target only by mid-2017.
In terms of distribution of risks, the Fed can move the rate forward a little bit earlier or later, while the IMF argues a rate hike a little bit later could insure the economy against the risk of disinflation, policy reversal and ending back at zero policy rates.
If the Fed moves earlier, the economy, potentially not robust enough, could not withstand the contractionary effect of financial conditions, and there is the risk of stalling the economy, Chalk said.
Although a late liftoff could probably be associated with “a little bit more” inflation which might be higher than the Fed’s target, “that’s not a bad problem” especially in view of the current global disinflationary scenario, Chalk said. He added that the Fed knows how to deal with inflation thanks to past experiences.
In regard to financial stability, the IMF argues monetary policy should be used in an effort to reduce leverage and dampen financial stability risks. Instead, a macro-prudential framework and regulatory tools should be used to ensure financial stability.
Meanwhile, Chalk said the IMF has misjudged the timing and effects of low oil prices and consumers’ spending power. There was a persistent drop in oil sector investment, while consumers are holding back their spending despite the boost from low oil prices.
Some Fed officials have also become less confident about the U.S. economic outlook in view of recent soft economic data.
William Dudley, president of the New York Fed, on Friday expressed his uncertainties about near-term growth and the labor market in the United States. In April, however, the senior official had said he was “relatively optimistic about the growth outlook for 2015.” Enditem