IMF Anticipates 'Persistent Inflation Problem' For US, Interest Rates To Stay At 5.5% Until 2024

The International Monetary Fund says the U.S. economy won't escape the challenge of persistent inflation if the job market does not soften and monetary policy does not stay tight for an extended period of time. On Friday, the U.S. Bureau of Economic Analysis (BEA) revealed another hotter-than-expected price consumption expenditure (PCE) inflation reading, cementing market expectations for an interest rate hike in June or July.  

"The strength in demand and labor market outcomes is a double-edged sword, contributing to more persistent inflation," the IMF Article IV mission statement read. The IMF added that core and headline PCE inflation will continue to stay over the Fed's 2% target during 2023 and 2024.

To effectively return inflation to target, the Fund anticipates that the federal funds rate will need to remain in the 5.25% to 5.5% range until late 2024.

The IMF's Article IV represents a recurring health check of the member countries' economic and financial performance, and is carried out by an official staff visit or mission. 

IMF Sees Greater Risks for US Economy

The Fund's staff advised the Federal Reserve to communicate more clearly about its future policy path, since this may assist in aligning financial conditions more closely with the stance of monetary policy.

More importantly, the IMF also points to systemic risks to both the U.S. and the global economy regarding the brinkmanship over the federal debt ceiling. 

"To avoid exacerbating downside risks, the debt ceiling should be immediately raised or suspended by Congress," the IMF statement says. 

Given the present level of inflation, fiscal policy is still considered overly accommodative, and a stricter fiscal posture would reduce the Federal Reserve's burden in deflating the economy. Even with the required adjustment, the U.S. "debt would remain well above pre-pandemic levels over the next decade," the Fund said.

U.S. Economic Projections By the IMF

• The IMF forecasts a 1.7% U.S. GDP growth in 2023, falling to 1% in 2024.
• Headline inflation is anticipated to reach 3.8% at the end of 2023, falling to 2.6% by the end of 2024. Core inflation is expected to be 4.1% this year and 2.8% in 2024. 
• The unemployment rate is forecasted to rise from 3.8% in 2023 to 4.4% in 2024. 
• The U.S. public debt-to-GDP ratio is expected to slightly rise from 96.6% in 2023 to 98.4% in 2024. 
• The yield on the 10-year Treasury bond is seen edging down from 4% at the end of this year to 3.7% at the end of 2024. 

Read now: US Stocks Soar On Debt Ceiling Deal Hopes Despite Fed Hike Risks; Nvidia Eyes $1-Trillion Market Cap On Monster AI Rall