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The International Monetary Fund stated on Friday that the US Federal Reserve should tighten monetary policy more quickly in view of mounting inflation risks.
The Fed announced in early November that it would begin tapering — or reducing the amount of bonds it buys — “later this month” at a rate of $15 billion per month. The IMF, however, urged that this pace should be expedited in light of the discovery of a new Covid type and inflation above target.
“We see grounds for monetary policy in the United States — with gross domestic product close to pre-pandemic trends, tight labor markets, and now broad-based inflationary pressures — to place greater weight on inflation risks as compared to some other advanced economies including the euro area,” the IMF said in a blog post. “It would be appropriate for the Federal Reserve to accelerate the taper of asset purchases and bring forward the path for policy rate increases.”
Chairman Jerome Powell of the Federal Reserve said earlier this week that the central bank could accelerate its tapering efforts, and that this would likely be considered at a meeting later this month. The consumer price index in the United States increased 6.2 percent year over year in October, reaching its highest level in 30 years, according to data released in November. The Fed, on the other hand, has stated that market participants should not read tapering as a hint of an impending rate hike. The IMF is requesting that central banks, not just the Federal Reserve, express their goals clearly in this context.
“It is essential for major central banks to carefully communicate their policy actions so as not to trigger a market panic that would have deleterious effects not just at home but also abroad,” the IMF said. However, not everyone agrees that central banks should tighten more quickly. Fidelity International CEO Anne Richards encouraged authorities on Tuesday not to act too quickly.
“I do subscribe strongly to this view that it’s better to wait a month or two months and just be clear on the data path before acting. I think that is a lesser evil than acting prematurely to tighten,” she said.