IMF official highlights need to minimize risk of US Fed rate hike spillovers

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An International Monetary Fund (IMF) official has said that the pace and endpoint of the US Federal Reserve’s (US Fed) interest rate hikes are “uncertain,” noting the importance of clear communication to “minimize the risks of adverse spillovers.”
“When you know what’s coming, it’s much easier to be ready for it and to prepare for it,” Petya Koeva Brooks, deputy director of the IMF’s Research Department, told Xinhua in a remote video interview on Tuesday.
Brooks said the inflation readings in the United States have been high due to a combination of factors: supply bottlenecks, the impact of energy prices, the strength of domestic demand and a tight labour market.
The IMF official said the policy communicated by the US Fed is “appropriate.” “I think it is time to start removing that exceptional stimulus that had been provided to the economy,” she said.
Brooks’ remarks came one day before the US Fed announced that it will soon be appropriate to raise its benchmark interest rate, with inflation well above the target of 2% and a strong labour market.
Many US Fed officials have signalled in recent weeks that they would be comfortable with a rate increase at the US Fed next meeting in March due to elevated inflation pressures.
“The path through which this happens is highly uncertain and the pace and the endpoint are uncertain,” Brooks told Xinhua.
“But what’s important is to be very clear and to communicate well, just in terms of how the thinking evolves as the new data comes in,” she said. “We are in an unprecedented situation. So it’s good to be ready.”
The IMF has revised up 2022 inflation forecasts for both advanced and emerging market and developing economies, with elevated price pressures expected to persist for longer, according to the newly released update to its World Economic Outlook report. Assuming that inflation expectations remain anchored, inflation is expected to subside in 2023.
The update projected the global economy to grow by 4.4% in 2022 amid the Omicron surge, down by 0.5 percentage points from October’s forecast, noting that growth will slow as economies grapple with supply disruptions, higher inflation, record debt and persistent uncertainty.
Brooks said the IMF assumption is that while there may be localized lockdowns and “things kind of flaring up,” the level of COVID-19 hospitalizations and the number of deaths from COVID-19 will be at much lower levels by the end of the year.
“Which is another way of saying that we’re essentially moving to a situation wherein one shape and form we are living with the virus,” Brooks said. “So when it comes to the economic impact … we expect that effect to not be as pronounced in the latter part of this year.”
Brooks, however, warned that there are downside risks to the IMF’s assumptions regarding the pandemic. “So we cannot preclude the possibility of a new variant and then that having an implication for economic activity.”
The IMF official noted that despite continued recovery, countries will still have to grapple with some of the legacies of the crisis, one of which is the educational losses that had been incurred.
The effects are “much more pronounced” and the potential repercussions are “much worse” for many low-income emerging markets where remote learning is a challenge, she said.
“So the human capital aspect of this is something that I think we’ll need to put in a lot of effort to reverse over the coming years,” Brooks said.
According to the IMF’s latest projection, advanced economies are expected to grow by 3.9% in 2022, down by 0.6 percentage points from October’s forecast, while emerging market and developing economies are on track to grow by 4.8%, down by 0.3 percentage points from the previous forecast.
The Chinese economy will see a growth rate of 4.8% in 2022, and 5.2% next year.
There have been some “encouraging signs” in the Chinese economy amid the pandemic as it transitions toward a green economy, the IMF official noted.
“I think that involves the type of green infrastructure efforts that would pay off in the long term and also investment in technology. And I think the type of things that are going to serve China well over the coming decades,” she said.
The IMF projects that global trade is on track to grow by 6% this year, down by 0.7 percentage points from October’s forecast. Global trade will expand by 4.9% next year, the projection showed.
Commenting on the Regional Comprehensive Economic Partnership Agreement signed by 15 Asia-Pacific countries including China, which recently entered into force, Brooks told Xinhua that the IMF has been “very supportive” of the trade agreement.
“I think it will have a positive impact. I think it’s a good sign. I think collaborating is always good, especially in the trade area,” she said.
The IMF official said the pact should not merely serve as a substitute for trade in the region and the world.
“It should be a complement to having global solutions to trade problems and making sure that also the WTO functions well and that there is no escalation of global trade conflicts and such,” Brooks said.

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