The International Monetary Fund sees the Federal Reserve maintaining large monthly bond purchases until at least the end of this year and urged the central bank to carefully manage its exit plan to avoid disrupting financial markets.
Unwinding a policy of record-low interest rates and $85 billion in monthly bond-buying known as quantitative easing will be challenging even though the Fed has “a range of tools” to withdraw the stimulus, the IMF staff wrote in its annual assessment of the U.S. economy.
“Effective communication on the exit strategy and a careful calibration of its timing will be critical for reducing the risk of abrupt and sustained moves in long-term interest rates and excessive interest-rate volatility as the exit nears,” according to the concluding statement released Friday.
Such moves “could have adverse global implications, including a reversal of capital flows to emerging markets and higher international financial market volatility,” the staff said in the report.
Concern is already showing, with almost $3 trillion that has been erased from the value of global equities since Fed Chairman Ben Bernanke said May 22 the central bank could scale back stimulus efforts should the job market outlook show “sustainable improvement.”
Bernanke will have an opportunity to retune the Fed’s message during a press conference on June 19 after the Federal Open Market Committee concludes a two-day meeting and releases a policy statement.
The Washington-based IMF left its U.S. growth forecast for this year unchanged at 1.9 percent, which assumes that budget cuts may trim as much as 1.75 percentage points off the expansion. It also lowered its prediction for 2014 to 2.7 percent, from 3 percent growth predicted in April.
Investors’ overreaction to the Fed’s initial steps to normalize its monetary policy is also a risk to the country’s growth outlook, according to the fund, which said other threats include a stronger impact of fiscal tightening and a reigniting of Europe’s debt crisis.
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