Fed Likely Needs to Raise Rates as Soon as Late 2022, IMF Says

The Marriner S. Eccles Federal Reserve building in Washington, D.C., U.S. (Photographer: Stefani Reynolds/Bloomberg)

Fed Likely Needs to Raise Rates as Soon as Late 2022, IMF Says

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The Federal Reserve probably will need to begin raising interest rates in late 2022 or early 2023 as increased government spending keeps inflation above its long-run average target, according to the International Monetary Fund.

The U.S. central bank likely will begin to scale back asset purchases in the first half of 2022, staff from the Washington-based fund said in a statement Thursday following the conclusion of so-called article IV consultations, the IMF’s assessment of countries’ economic and financial developments following meetings with lawmakers and public officials.

“Managing this transition -- from providing reassurance that monetary policy will continue to deliver powerful support to the economy to preparing for an eventual scaling back of asset purchases and a withdrawal of monetary accommodation -- will require deft communications under a potentially tight timeline,” IMF staff said in the concluding statement.

Fed Likely Needs to Raise Rates as Soon as Late 2022, IMF Says

The Fed held interest rates near zero at its June 15-16 meeting and signaled it would probably keep them there through next year to help the U.S. economy recover from Covid-19. Officials penciled in two rate hikes for 2023 and seven of the 18 policy makers want to raise rates in 2022, up from four in March.

Fed Chair Jerome Powell has said that recent steep increases in inflation will prove to be largely transitory due to bottlenecks and that expectations on the whole are where the Fed wants them.

Inflation Forecasts

The personal consumption expenditures price gauge that the Fed uses for its inflation target rose 3.9% in May from a year earlier, the most since 2008. The IMF forecasts the increase to be transitory, with the index peaking at 4.3% and dropping to around 2.5% by the end of 2022. That’s still above the Fed’s long-run average target of 2%.

At its June meeting, the Federal Open Market Committee marked up all its inflation forecasts through the end of 2023, with officials seeing personal consumption expenditures -- their preferred measure of price pressures -- rising 3.4% in 2021 compared with a March projection of 2.4%. They increased the 2022 forecast to 2.1%, and 2.2% for the following year.

Fund staff estimates that the higher U.S. spending proposed by President Joe Biden in the infrastructure-focused American Jobs Plan and the social-spending-based American Families Plan -- which have yet to pass -- would increase growth in gross domestic product by a cumulative value of about 5.25% from 2022 to 2024.

The IMF raised its estimate for U.S. economic expansion this year to 7% -- the fastest pace since 1984 -- from a 6.4% forecast in April.

Lawmakers have release a wave of pandemic-relief funds over the past 15 months to buoy the economy with the $1.9 trillion American Rescue Plan passed in March, a $900 billion package approved in December and the $2 trillion Cares Act of March 2020.

“The unprecedented fiscal and monetary support, combined with the receding Covid-19 case numbers, 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.”

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