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The U.S. Federal Reserve will need to raise interest rates no later than late 2022 or early 2023 as more government spending pushes inflation’s rate beyond the Fed’s 2-percent target, the International Monetary Fund (IMF) said in a 1 July statement.
Early in 2022, the Fed is likely to begin to scale back its $120-billion monthly bond purchases, the IMF said, following conversations with legislators and financial officials.
“Managing this transition…will require deft communications under a potentially tight timeline,” the IMF stressed.
The Fed’s most recent statements have maintained 2024 as the time when it will increase rates and reduce its bond-buying.
The Personal Consumption Expenditures Price Index, which the Fed uses to gauge inflation, rose 3.9 percent from May 2020 to May of this year, the fastest pace since 2008.
That rise will be short-lived, the IMF predicted, peaking at around 4.3 percent later this year, then fading to about 2.5 percent – 20 percent above the Fed’s target rate – by the end of 2022.
At its June meeting, the Fed’s Open Market Committee raised its 2021 inflation expectation from 2.4 percent to 3.4, followed by 2.1 percent in 2022 and 2.2 percent in 2023.
The IMF raised its outlook for U.S. GDP this year to 7 percent from the 6.4 percent it had foreseen in April.
Federal stimulus spending, the Fed’s bond purchases, and the gradually easing virus infestation “should provide a substantial boost to activity in the coming months,” the IMF said.
“Savings will be drawn down, demand will return for in-person services, and depleted inventories will be rebuilt,” it said, all of which are likely to push prices higher.
Also, persistent inflation – more than an economic recovery and strong jobs market – will force the Fed to jack interest rates by at least 0.5 percentage points by the end of 2022 and raise rates at least twice by the end of 2023, according to a majority of 52 economists surveyed by the Financial Times.
That estimate aligns closely with the Fed’s own extrapolation of current data about when a rate hike would be triggered, the FT reported.
A majority of the economists surveyed rated the likelihood of a rate increase of 50 basis points by the end of next year at no less than 75 percent; a smaller but significant number said the chances were 90 percent.
TREND FORECAST: The Fed will resist pressures to raise rates as long as possible, in order to sustain equity markets’ high values as long as possible.
As we have said, even if inflation stays above 3 percent for the rest of this year, one point above the Fed’s 2-percent target rate, the central bank will resist raising rates as equities and the economy begin to weaken.