By Steven K. Beckner
(MNI) – Although the U.S. economy’s prospects have improved
somewhat, the Federal Reserve should maintain its very lax monetary
policy and be prepared to do more “unconventional” monetary easing, the
International Monetary Fund warned Tuesday.
The IMF’s periodic World Economic Outlook report had similar advice
for other advanced countries and went even further in the case of
Europe, urging the European Central Bank to cut interest rates.
As for fiscal policy, the IMF staff, which wrote the WEO report,
urged countries to curb budget deficits — but only over the longer
term. Near term, it warned that too much “fiscal consolidation” would
create “a drag” on economic growth.
The report, released in advance of the Spring meetings of the IMF
and World Bank, modestly revised up prior projections of global growth
but warned of continued “downside risks,” notably the possibility of a
reintensification of European debt difficulties and the threat of a new
oil shock due to tensions in the Middle East.
“With the passing of the crisis and some good news about the U.S.
economy, some optimism has returned,” IMF Economic Counselor Olivier
Blanchard wrote in a forward to the WEO, but “it should remain
tempered.”
“Even absent another European crisis, most advanced economies still
face major brakes on growth,” wrote Blanchard, “and the risk of another
crisis is still very much present and could well affect both advanced
and developing economies.”
Blanchard and his staff have revised up their global GDP growth
forecast by 0.2 percentage points in 2012 to 3.5% and by 0.1 percentage
point to 4.1% for 2013. They have revised up U.S. growth by 0.3 to 2.1%
in 2012 and by 0.2 to 2.4% next year.
The IMF economists were less optimistic about the euro area, even
while acknowledging that the crisis there has subsided for the time
being. After making modest upward revisions, they projected a 0.3%
contraction in 2012, followed by modest 0.9% growth in 2013.
“Various fundamental problems remain unresolved” in the euro area,
the IMF report said, and “spillovers” from Europe through financial and
trade channels could jeopardize growth worldwide.
Globally, “prospects are strengthening again, but downside risks
remain elevated,” according to the WEO. “The global economy remains
unusually vulnerable.”
Going even further, the WEO warned, “In the current environment of
limited policy room, there is also the possibility that several adverse
shocks could interact to produce a major slump reminiscent of the
1930s.”
In the gloomy context of “major downside risks,” as well as
“anemic” economic growth and persistent “large output gaps,” the WEO
argued “these challenges call for more policy action, especially in
advanced economies: implementing agreed medium-term fiscal consolidation
plans without overdoing adjustment; maintaining a very accommodative
monetary policy stance and providing ample liquidity to help repair
household and financial sector balance sheets; and resolving the euro
area crisis without delay.”
The report called for retaining, if not reinforcing stimulative
monetary and fiscal policies.
“Rates are expected to stay close to the zero lower bound in the
United States and Japan for at least the next two years,” said the WEO,
which went on to anticipate a “modest easing” in the euro area,
After declaring that “the ECB has some room to further lower the
policy rate,” the report was more blunt: “the ECB should lower its
policy rate while continuing to use unconventional policies to address
banks’ funding and liquidity problems.”
Elsewhere, the WEO noted that “policy rates in Japan, the United
Kingdom, and the United States are already close to or at the lower
bound, but added, “Should downside risks to the growth outlook threaten
to materialize, their central banks could step up their unconventional
policies, preferably in a way that eases credit conditions for small and
medium-size firms and households.”
Zeroing in on the Bank of Japan, the report said “further monetary
easing may in any case be needed to ensure achievement of the inflation
objective over the medium term.”
Despite recent rises in producer and consumer prices, the IMF
suggested the U.S. central bank has leeway to keep monetary policy easy
if not make it easier by projecting that inflation will “fall to about
2% in 2013.”
The WEO expressed the hope that Fed “communication” — its stated
expectation that the federal funds rate will need to stay near zero “at
least through late 2014″ — will work to “enhance the expansionary
effect of current monetary policy settings.”
But it didn’t stop there. Without using the words, it suggested
that a third round of quantitative easing might be in order. The Fed
“should also stand ready to implement unconventional support if activity
threatens to disappoint, so long as inflation expectations remains
subdued.”
** MNI **
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