IMF calls for Fed to raise rates further — 'The job is not quite yet done'
The International Monetary Fund said Friday in a new report that the US can avoid a recession this year and that the Federal Reserve should raise interest rates again and hold them there through late next year.
Amid persistent inflation, the IMF says the Fed needs to raise rates by another quarter percentage point to a range of 5.25%-5.5% from the current range of 5%-5.25%.
IMF Managing Director Kristalina Georgieva suggested during a press conference Friday that there could be upside to interest rate hikes, but it would depend on the data.
“Inflation remains stubbornly high, PCE is telling us that the job is not quite yet done…Frankly, we need to continue to follow the data and see how much it would take to bring inflation to target,” Georgieva said.
Georgieva's comments come as the Fed’s preferred measure of inflation – the consumption expenditures index, excluding volatile food and energy prices – rose 4.7% in April, accelerating from 4.6% in March.
The IMF warned in its report that the Fed’s ten interest rate hikes since last March may not be enough to bring down inflation to the Fed’s 2% target.
The international body said with a large share of households and businesses invested in longer-term debt at fixed rates, consumer spending and business investment have proven less interest-sensitive than in past rate hike cycles.
“This creates a material risk that the Federal Reserve will have to raise the policy rate by significantly more than is currently expected to return inflation to 2 percent,” the IMF's report said.
The IMF now sees inflation falling slowly — ending the year only around 4%— and expects inflation will remain above the Fed’s 2% target through next year.
Georgieva met with Treasury Secretary Janet Yellen and Fed Chair Jay Powell Friday morning, saying there was “significant convergence between the views of the Fed and the administration and what we're coming with.” Georgieva added that there were aspects of the IMF’s recommendations that the teams would reflect on further.
Higher interest rates for longer periods could cause more issues in the banking sector, as already witnessed with the collapse of Silicon Valley Bank, Signature Bank, and First Republic. The IMF warned higher rates could reveal larger, more systemic balance sheet problems in banks than what has been seen publicly.
“Unrealized losses from holdings of long duration securities would increase in both banks and nonbanks and the cost of new financing for both households and corporates could become unmanageable,” the report read. “Such a tightening of financial conditions could trigger an increase in bankruptcies [and] worsen credit quality.”
Georgieva also called for the US debt ceiling to be raised immediately or suspended, calling it an “entirely avoidable risk” to both the US and the world economy.
“We’re in the 12th hour now,” said Georgieva. “We have all read the fairytale of Cinderella having to leave the ball at midnight. We are there. Before our carriage turns into a pumpkin, can we please get this solved?”
The IMF chief says a permanent solution needs to be developed to avoid the debt limit brinkmanship in the future.