MNI:Higher For Longer Rates Needed To Tame Giddy Investors-IMF
Inflation remains a bigger risk than is being priced in, fund officials say.
Central banks need to "push back" against investors who are overly optimistic about slowing inflation and send the message that interest rates must remain higher for longer to prevent a resurgence of prices, IMF researchers said in a report Thursday.
Bond-market rallies have loosened financial conditions and counteracted the jump in official lending rates at a time when headline and core inflation remain too high and expectations could become unanchored, according to a blog post by officials at the Washington-based fund.
"Investors may be too sanguine about progress on disinflation," wrote Tobias Adrian, Christopher Erceg and Fabio Natalucci of the IMF's capital markets department. "Central banks must therefore be resolute in their fight against inflation and ensure policy remains appropriately tight long enough to durably bring inflation back to target."
Yield curves in the U.S. and other major economies have inverted on signs that headline inflation has peaked and fears the toughest hiking cycle in decades will bring recessions and jumps in unemployment. The report comes just after the Fed hiked another 25bps to the highest since 2007 and Chair Jerome Powell said he sees no rate cut this year because of stubborn inflation, and the ECB and BOE also raises rates and signaled more is needed.
"It is critical for policymakers to remain resolute and focus on bringing inflation back to target without delay," the IMF officials said.