In its latest staff statement on the annual analysis of the U.S. economy, known as the Article IV review, the IMF again demonstrated why economists have become the butt of financial jokes, when in the same report it first urged the Fed to “overshoot” its 2% inflation target (a code phrase to unleash even more easing, perhaps even including helicopter money), clearly unaware of the dramatic shift in sentiment that unorthofox monetary policy no longer works to stimulate inflation, and in fact quite the opposite, while at the same time it cut its US GDP forecast yet again, from 2.4% to 2.2%, which means it is only 25% off again…
… and concluded that, drumroll, there is “an urgent need to tackle poverty.“
Here is the full recap courtesy of MNI:
The Federal Reserve should be willing to allow inflation to go beyond the 2% goal and approach the target from above, which would ward off disinflation and allay the risks getting trapped again at the zero lower bound, the International Monetary Fund said in a report Wednesday.
But U.S. monetary policy should be moving upward gradually,
“Given the likelihood and severity of downside risks to inflation, the potential for a drift down in inflation expectations, the Fed’s dual mandate of maximum employment and price stability, and the asymmetries posed by the effective lower bound, the path for policy rates should accept some modest, temporary overshooting of the Fed’s inflation goal to allow inflation to approach the Fed’s 2% medium-term target from above,” the statement said.
“Doing so will provide valuable insurance against the risks of disinflation, policy reversal, and ending back at a zero fed funds rate.”
While the IMF does not hesitate to comment on monetary policy, this specific course recommendation, which would be at odds with some Fed policymakers, is unusual. But the IMF reiterated that, “At this point in the cycle, there is a clear case to proceed along a very gradual upward path for the fed funds rate.”
The fund staff repeated the long-standing exhortation that the Fed “should be clear in communicating its intentions and emphasize that its medium-term inflation goal is symmetric and that inflation could well approach their target from above.”
It added, that “Evidently, monetary policy should remain data dependent.” And as a result, “If either wage or price inflation becomes visible at a faster pace than is embedded in staff’s current forecasts, interest rates should be raised on a more front-loaded timetable.”
While saying the U.S. “is, overall, in good shape,” the IMF once again cut the GDP forecast for 2016 by two-tenths to 2.2% compared to the April World Economic Outlook, which itself had cut the forecast two-tenths from the January WEO. The 2017 estimate remained unchanged at 2.5%.
Still, “Inflation remains contained, and the U.S. economy has repeatedly demonstrated its resilience in the face of financial market volatility, a strengthening dollar, and subdued global demand,” the report said, “and PCE inflation is expected to rise slowly toward 2%.”
While the May jobs report “raises concerns that U.S. growth may be losing momentum,” the IMF notes the employment data “is typically a lagging indicator,” and adds that “high frequency indicators point to activity already reaccelerating in the second quarter.”
Still it notes several risks to the economy, calling the U.S. dollar a “symmetric risk to growth” while there are “upside risks from oil,” and “the possibility non-oil business investment may continue to weigh on the outlook in the coming quarters.”
In addition, the IMF cites a “more complex risk” that U.S. potential growth is lower than previously estimated, which “would mean the U.S. economy could increasingly bump up against capacity constraints. Further, it could imply that, with less slack in the economy, the near-term will see more pronounced inflationary pressures, necessitating a more assertive increase in policy rates, even in the face of weaker growth.”
Beyond the forecast for the economy, the IMF again prescribed a series of policy reforms for the United States including boosting infrastructure spending, beefing up social programs and work training, and comprehensive reform of corporate income tax, among others.
The IMF said “the U.S. faces potentially significant longer-term challenges to strong and sustained growth. Concerted policy actions are warranted, sooner rather than later.”
In addition, the report said, “There is an urgent need to tackle poverty.” These actions would address the “consequences of falling labor force participation, an increasingly polarized income distribution, high levels of poverty, and weak productivity.”
On the question of funding new projects, the fund said, “they should be funded from new revenues or a reallocation of spending priorities and fit within a path for the fiscal deficit that ensures a steady decline in the public debt-to-GDP ratio.”
The IMF also urged U.S. lawmakers to “avoid self-inflicted wounds from future disagreements on the path for fiscal policy,” since gains from improved growth “could be easily dissipated by a repetition of past political brinkmanship over appropriations and the debt ceiling.”
The report called for “lasting solutions” to the fiscal fighting such as a measure to “replace the debt ceiling with a bipartisan agreement on a clear, simple medium-term fiscal objective.” Another alternative would be a “legislative process could be introduced that adjusts the debt ceiling automatically.”
