The International Monetary Fund issued a warning on Tuesday about the growing risks of inflation, casting doubts on the possibility of several interest rate cuts by the Federal Reserve this year.
In its most recent update of the World Economic Outlook, the IMF stated that “the pace of global disinflation is slowing, signaling obstacles ahead.” The report highlighted that the surge in inflation in the U.S. earlier in 2024 has caused it to trail behind other major economies in terms of loosening monetary policies, as outlined in the report.
Simultaneously, traders are increasingly anticipating a reduction in interest rates by the Fed in September. Based on the FedWatch tool from the CME Group, the market has completely factored in a rate cut during the meeting on September 18. Traders are also predicting another rate reduction in November.
However, the IMF’s chief economist Pierre-Olivier Gourinchas emphasized on CNBC’s “Squawk on the Street” that a single interest rate cut by the Fed this year would be the most appropriate action, citing persistent obstacles like services and wage inflation hindering the pathway to decreasing overall inflation.
Gourinchas noted that although robust wages and service inflation are “not necessarily alarming,” they remain critical issues for the U.S. economy. His comments came after the U.S. Labor Department released a report indicating that the consumer price index had the slowest year-over-year growth since April 2021 last month.
Despite the favorable Consumer Price Index (CPI) report, Gourinchas suggested that the earlier upsurge in inflation this year implies that achieving lower inflation levels and executing rate cuts “might take longer than what the markets are expecting.”
“We anticipate there may be some interest rate cuts towards the end of this year, possibly only one in 2024 and potentially more cuts in 2025,” mentioned Gourinchas.
On a global scale, the IMF forecasts a deceleration in disinflation rates in 2024 and 2025 across developed economies due to heightened service inflation and commodity prices.
Turning attention to the U.S. economy, the IMF revised its growth projection downward by 0.1 percentage points to 2.6% in 2024 due to diminished consumption and slower-than-anticipated growth in the initial part of the year.
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