IMF recommends extending quantitative easing

In its annual review of the US economy, the International Monetary Fund has urged the Federal Reserve to be careful in winding down its quantitative easing policy so as not to disrupt the financial markets.

Excessive interest rate volatitlity that could result from an ill-thought out exit plan “could have adverse global implications, including a reversal of capital flows to emerging markets and higher international financial market volatility”. It recommends maintaining asset purchases at least to the end of the year in order to support recovery.

The IMF has left its annual growth forecast for the US unchanged at 1.9 per cent and has lowered its 2014 prediction from three per cent to 2.7 per cent growth. It adds that 2013 growth could be as much as 1.75 percentage points higher if not for the rushed approach to cutting the deficit.

The IMF also expresses concern over the struggling eurozone, which could impact the US through both trade and finance, and over low growth in emerging market countries.

From the concluding statement of the report:

The automatic spending cuts (“sequester”) not only exert a heavy toll on growth in the short term, but the indiscriminate reductions in education, science, and infrastructure spending could also reduce medium-term potential growth.

These cuts should be replaced with a back-loaded mix of entitlement savings and new revenues, along the lines of the Administration’s budget proposal.

At the same time, the expiration of the payroll tax cut and the increase in high-end marginal tax rates also imply some further drag on economic
activity. A slower pace of deficit reduction would help the recovery at a time when monetary policy has limited room to support it further.