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Fed and many central banks prepare to tighten policy

Fed and many central banks prepare to tighten policy

The US Federal Reserve (Fed) and many central banks around the world need to prepare to tighten policies to prevent out-of-control inflation, the International Monetary Fund (IMF) warned.

Fed headquarters in Washington, DC Photo: AFP

The above warning was stated by the IMF in its quarterly update of the global economic situation. In particular, the organization lowered its global growth outlook for 2021, and lowered its forecast for US GDP growth by 1 percentage point released in July to 6%. For other developed economies, growth is forecast at around 5.2%.

In the same report, the IMF noted that the US, UK, and other developed economies are facing the risk that inflation may increase.

The IMF said it agrees with the assessment of the Fed and many economists that rising commodity prices globally will cool down, but there is still much uncertainty related to this prediction.

“As loose monetary policy generally increases inflation, central banks need to be prepared to act quickly if inflation risks make the path of recovery unpredictable,” said Gita Gopinath, an adviser to the central bank. economic consultant and director of research at the IMF.

“Central banks need to plan for side actions, announce incentives and act on that announcement,” added Gita Gopinath.

Fed officials say the primary weapon to “fight” inflation is to raise interest rates. But so far, the Fed has not raised interest rates once, since 2018.

With inflation at a 30-year high, the Fed has a headache to consider scaling back the ultra-easing policy it has implemented through fiscal stimulus packages and financial purchases. large-scale production since the Covid-19 epidemic appeared in early 2020.

Although the IMF did not name the Fed, its assessment of inflation indirectly implied that the Fed needed to make major changes in the policy it applied in September 2020. the point where the Fed thinks it will be ready for hotter-than-normal inflation to achieve its overarching employment target.

Meanwhile, the IMF believes that these types of monetary policies will pose dangers if inflation forecasts start to increase rapidly.

The Fed uses a tool called “forward guidance” to paint a clear picture of its intentions to the public. their in the future, along with standards to serve as a basis for policy adjustment. But the IMF believes that communication orientation is the key issue for the US economy to avoid the shocks of breakdown before policy changes.

A person who believes that inflation will “cool down”, Jamie Dimon, CEO of US commercial bank JPMorgan Chase, said earlier this week he expects supply chain issues to have driven commodity prices higher in the coming year. the past time, will be resolved in 2022.

The picture of US inflation, especially the consumer price index (CPI) in September is being closely watched by investors and analysts. Previously, some economists had predicted that the price of common consumer goods in the US would increase by about 0.3% in September, bringing the year-over-year increase to 5.3%.

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