MNI: IMF Sees Faster Fed Taper, Says Other CBs May Need to Act

The Federal Reserve should accelerate the tapering of asset purchases and its path to raising near-zero interest rates as a strong economy boosts core inflation, and other central banks facing similar pressures should follow a similar tightening, the IMF said Friday in one of its starkest warnings to date about the dangers of entrenched price gains.

"We see grounds for monetary policy in the United States—with gross domestic product close to pre-pandemic trends, tight labor markets, and now broad-based inflationary pressures—to place greater weight on inflation risks as compared to some other advanced economies including the euro area. It would be appropriate for the Federal Reserve to accelerate the taper of asset purchases and bring forward the path for policy rate increases," monetary and capital markets director Tobias Adrian and research director Gita Gopinath wrote in a blog post.

"Over time, if inflationary pressures were to become broad-based in other countries, more may need to tighten earlier than currently expected," they wrote. "It is essential for major central banks to carefully communicate their policy actions so as not to trigger a market panic that would have deleterious effects not just at home but also abroad, especially on highly leveraged emerging and developing economies."

Rising food and energy costs "may continue to add to inflation in 2022," they wrote. Inflation expectations so far remain close to target in most economies. Core inflation has been boosted by expansionary policy, consumer spending patterns altered by the pandemic, supply chain disruptions and there are signs of new wage pressures.

"Risks of a further acceleration of inflation previously flagged in our global publications and country-specific reports are materializing, with supply disruptions and elevated demand lasting longer than expected. Inflation is likely to be higher for longer than previously thought," they wrote.

"While we still anticipate that supply-demand imbalances will wane next year, a singular focus of monetary policy on supporting recovery may well fuel substantial and persistent inflationary pressures, with some risk of de-anchoring inflation expectations."