The head of the International Monetary Fund warned that the risk of a prolonged increase in inflation, particularly in the U.S., could prompt the Federal Reserve to raise benchmark interest rates sooner than expected, a development that would not only impact U.S. borrowers but potentially hurt developing nations struggling most with COVID-19.
“There is a risk of a more sustained rise in inflation or inflation expectations, which could potentially require an earlier-than-expected tightening of US monetary policy,” Kristalina Georgieva, managing director of the IMF, wrote Wednesday in a blog post. Higher interest rates “would pose major challenges especially to countries with large external financing needs or elevated debt levels.”
Aggressive vaccine rollouts, fiscal stimulus, and ultralow interest rates have helped advanced countries recover from the economic slump triggered by COVID-19, but with the rapid growth has come rising consumer prices. Inflation in the U.S., for example, jumped to 5% in May—the highest year-over-year rate since 2008—as prices for food, gas, cars and other items rose. And while Fed officials have repeatedly said the recent increases are probably only temporary, raising interest rates is one way the Fed can slow an overheating economy and curb inflation.
Georgieva cautioned the U.S. and other countries with accelerating growth to “avoid overreacting to transitory increases in inflation” because of the risks to emerging and developing economies—countries that don’t have the same vaccine availability or government support and reflect the world’s “worsening two-track recovery.” In the U.S., the Fed has already moved up its timeline for raising its benchmark interest rate (at virtually zero since the pandemic hit in March 2020) to 2023, a move that will impact borrowing rates for mortgages, credit cards and other loans.
Although the world is on track to achieve the IMF’s prediction for 6% economic growth this year—including 7% growth, the fastest clip since 1984, for the U.S.—many countries are falling further behind. The IMF is an organization representing 190 member countries working to foster international economic cooperation.
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