IMF backs Fed slowdown

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Officials at the International Monetary Fund on Tuesday backed the Federal Reserve’s decision to be patient in withdrawing its loose monetary policy stance despite the better prospects for the US economy. The US job market is on the mend, as US employers added 916,000 jobs last month. And on Tuesday, the IMF dramatically improved its economic outlook for the US in 2021 to a growth rate of 6.4% from its previous estimate in January of 5.1%.

Read: IMF Raises Outlook for US Economy Still, Fed policy continues to keep its policy interest rate close to zero and the central bank buys $ 120 billion in assets every month. When asked if the Fed should start heading toward the exit, Gita Gopinath, the IMF’s chief economist, said the Fed’s policy of moving gradually is consistent with its mandate. “They have also committed to, in a way, giving a warning well in advance if they were going to reverse course … so we hope that will happen,” he said. Gopinath said the Fed should provide clear guidance on its future actions to avoid another tantrum similar to the market turmoil in 2013, when signs of an “unexpected” policy tightening by the Fed hit emerging economies hard. , by causing capital outflows, lift emerging markets. yields and weakening of their currencies. For the IMF, the biggest risk remains “a general tightening of financial conditions.” Rather than hitting the hammer on interest rates, policymakers should focus on narrow “pockets of vulnerability.” “Continued policy support remains essential until a sustainable and inclusive recovery is established to maintain the flow of credit to the economy and prevent the pandemic from posing a threat to the global financial system. Monetary policy must remain accommodative, ”the IMF said in its latest Global Financial Stability Report. The sharp increases in US long-term bond yields seen this year partly reflect market expectations about the rate at which the Fed will normalize policy, the IMF said. If such increases are orderly and reflect stronger expectations for economic growth, then they need not pose difficulties for other countries. “But if instead the increases reflect the feeling that the monetary policy positions of advanced economies will need to tighten abruptly as the recovery gains momentum, then there could be adverse spillover effects in emerging market and developing economies. , particularly among those with high debt and large financing needs. ” said the IMF. Rather than withdraw support, policymakers should “strengthen selected macroprudential policy tools to address hotspots of high vulnerability.” If the tools are not available, policymakers should “develop them quickly.” Read: Central banks need to rethink the rules in non-banks, says IMF. Extraordinary political measures taken to combat the pandemic “may have unintended consequences, such as stretched valuations and growing financial vulnerabilities,” the IMF said. Equity markets have rallied aggressively since last fall and are now trading at levels “significantly higher than suggested by fundamentals-based models,” the IMF said. Another concern is that the business sector in many countries is emerging “over-indebted” from the pandemic. Banks’ appetite for risk during the next recovery is in doubt.