The International Monetary Fund entered the debate over when the Federal Reserve should begin to wind down its monetary easing program, calling on the central bank Friday to continue the large-scale bond purchases through this year — at least.
The Fed’s current monetary strategy has provided important support to the U.S. and global economic recovery, the IMF said in its annual assessment of the U.S. economy.
Even though “the recovery is gaining ground and is becoming more durable,” there is a “way to go before the economy regains its strength,” Christine Lagarde, the IMF’s managing director, said at a press conference.
The Fed has said it will continue its $85 billion-a-month bond-buying program until there is “substantial improvement” in the job market. But officials did not specify what would constitute such improvement, leading to rampant market speculation about the future of the stimulus program.
Investors are hoping the Fed will provide more clarity next week when officials hold their regular policy-setting meeting. Chairman Ben S. Bernanke will hold a press conference after the meeting, at which he is expected to offer a more detailed assessment of the overall health of the economy and the future for the bond purchase program. Though some Fed officials have pushed for dialing back the program as early as this summer, Bernanke has said the first reduction in purchases could occur over the next few meetings, depending on economic data.
There is no need to start tapering the bond buying program until next year, given that the unemployment rate is still high and inflation remains in check, the IMF said in its report. The IMF projected that inflation will remain subdued at 1.8 percent through 2014, while unemployment is expected to fall to 7.5 percent this year from 8.1 percent in 2012.
Even in 2014, any decline in the Fed’s bond-buying program should be slight, Lagarde said. The Fed should prepare for a smooth exit and focus on clearly communicating its intentions to the markets, she said.
The “unwinding of monetary policy accommodation is likely to present challenges,” the report said. In particular, the IMF warned of the danger of increased international financial market volatility should U.S. interest rates rise abruptly.
The IMF also continued to call the pace of current deficit reduction efforts excessive, projecting that the U.S. economy’s growth will slow to 1.9 percent this year, compared with 2.2 percent in 2012. It also lowered its growth projections for 2014 to 2.7 percent from 3 percent.
The pace of deficit reduction should be slowed in the short term to support the recovery, said Lagarde.
The automatic spending cuts known as the “sequester” are taking their toll on growth and are also “unfair because they hurt the most vulnerable,” she said. She added that the United States should “slow down the fiscal adjustment this year, which would help sustain growth and job creation, but hurry up with putting in place a medium-term road map to restore long-run fiscal sustainability.’’