IMF to Fed: raise rates

Doug Henwood dhenwood at panix.com
Thu Jul 13 08:59:55 PDT 2000


Financial Times - July 13, 2000

IMF urges Fed to raise rates By Gerard Baker in Washington

The US Federal Reserve needs to raise interest rates further to slow the economy and ensure that inflation remains under control, the International Monetary Fund said on Wednesday.

The fund's economists, in the conclusion of their annual consultation exercise with the US authorities, said the central bank had not done enough to slow the rapid pace of demand growth. They warned that a delay in raising interest rates again would have serious effects for the US and the rest of the world.

"How much more interest rates will need to be increased will depend on how the economy responds to past and subsequent steps to tighten policy," the report said.

It is unlikely to cause much anxiety at the Federal Reserve. Like most economists, the IMF has consistently underestimated the potential growth rate of the US economy in the past few years - and overestimated the degree of inflationary risk.

If its past warnings had been heeded the US would probably have had much slower growth over the past four years.

The concluding statement of the IMF's article IV consultation was released by the US Treasury. The IMF's full report will be published after the fund's executive board has reviewed it and commented on it later this month.

IMF economists were more direct in their prescriptions for Fed policy than they have been in the past. They said the Fed had acted "appropriately" in the past year, raising its key short-term interest rate target by 1.75 percentage points to 6.5 per cent. But they dropped the more cautious assessment of recent reports that said the Fed "may" need to raise rates again, and instead declared further increases were already necessary.

"Although tighter US monetary policy will inevitably have spillover effects on the rest of the world, including for the cost of financing in the emerging market countries, the impact would be more detrimental for these countries if the US authorities were to delay a policy response and subsequently needed to tighten monetary policy more sharply," the report said.

The Fed refrained from raising interest rates last month on evidence that the economy might be slowing. But it warned that it remained on the alert for any signs of inflationary pressure.

Alan Greenspan, the Fed chairman, is expected to give more clues to the Fed's thinking when he presents his half-yearly testimony on the US economy to the congress next week.

The IMF report had warm words for the Clinton administration. It welcomed the proposal to use fiscal surpluses in the next decade to eliminate completely the public debt by 2012. This is a key part of the policy platform of Al Gore, vice-president and Democratic presidential nominee.

It even said the federal government might need to maintain a budget surplus after that to meet its long term obligations to public pensions and medical insurance for the elderly.

It took at an implicit swipe at the plans by George W Bush, the Republican presidential candidate, for a big tax cut. "Although the underlying fiscal position appears to be very solid, the simple fact that changing economic conditions significantly alter medium term budgetary prospects argues strongly for caution in introducing new expansionary fiscal measures."



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