The International Monetary Fund (IMF) has issued a warning about the increasing risks of inflation, which may impact the Federal Reserve’s decision on interest rate cuts. In the latest World Economic Outlook update, the IMF noted that global disinflation is slowing down, indicating potential obstacles ahead. Despite the initial slow inflation growth in the U.S. in 2024, the country has fallen behind other major economies in terms of quantitative easing.
Market traders are anticipating a rate cut from the Federal Reserve in September, with a 100% probability according to the CME Group’s FedWatch tool. There are also expectations of another rate decrease in November. However, IMF’s chief economist Pierre-Olivier Gourinchas expressed a more cautious view. He suggested that a single rate cut from the Fed this year would be more appropriate, citing persistent services and wage inflation as potential obstacles to reducing overall inflation.
Despite reassuring remarks about robust wages and service inflation, Gourinchas highlighted these as areas of concern for the U.S. economy. The recent consumer price index data showing slow year-over-year growth since April 2021 has added to the uncertainties. As a result, the IMF has revised its growth forecast for the U.S. economy, lowering it by 0.1 percentage point to 2.6% in 2024. This adjustment is attributed to cooling consumption trends and slower-than-expected growth at the beginning of the year.
The IMF’s warning about increased inflation risks raises important questions about the potential impact on the U.S. economy and the Federal Reserve’s decisions regarding interest rates. While market expectations point towards multiple rate cuts, the IMF advocates for a more cautious approach. As uncertainties persist and challenges emerge, it is essential for policymakers to carefully navigate the path towards maintaining stable inflation and sustainable economic growth.