Accelerate Tapering of Asset Purchases and Tighten Monetary Policy: IMF

A participant stands near a logo of IMF at the International Monetary Fund—World Bank Annual Meeting 2018 in Nusa Dua, Bali, Indonesia, Oct.12, 2018. (Johannes P. Christo/Reuters File Photo)

The U.S. Federal Reserve should speed up the elimination of its bond-buying program and tighten its monetary policy to rein in the inflationary pressures facing the country, said the International Monetary Fund on Friday.

“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,” said Chief Economist Gita Gopinath, and Financial Counsellor and Director Tobias Adrian 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.”

The blog post has echoed a recent change of stance from the Fed. In an apparent about-turn, Chair Jerome Powell told the House Financial Services Committee Wednesday that he was not sure if the inflation will remain “transitory.”

“The point is, we can’t act as if we’re sure of that,” he said. “We’re not at all sure of that. Inflation has been more persistent and higher than we’ve expected.”

“The word transitory has different meanings for different people. To many it carries a sense of short-lived,” regarding the consistent description of inflation as transitory. “I think it’s probably a good time to retire that word and try to explain more clearly what we mean.”

The IMF blog post talked about uncertainties posed by the latest COVID-19 variant, Omicron, and advised nations around the world to calibrate responses based on their unique economic circumstances.

Core consumer price inflation refers to a measure of inflation without the costs of volatile food and fuel. Based on the data from the IMF, the United States leads all other developed nations including the UK, Canada, Australia, and the euro zone in terms of core inflation.

The rise in core inflation is attributed to strong demand that is supported by favorable fiscal and monetary policies. Combined with supply shortages, this has led to the current stage of increase in prices, according to the IMF. Price pressures are predicted to cool down next year.

“We expect the mismatch in supply and demand to attenuate over time reducing some price pressures in countries. Under the baseline, shipping delays, delivery lags, and semiconductor shortages will likely improve in the second half of 2022. Aggregate demand should soften as fiscal measures come off in 2022.”

The IMF reiterated that in countries where “inflationary pressures [are] more acute it would be appropriate to accelerate the normalization of monetary policy.”

The U.S. consumer price index has risen by 6.2 percent, the highest level it has reached in 31 years.

“In this environment 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.”