IMF Managing Director: 'Fed should keep interest rates unchanged until the end of the year'

The head of the IMF said that the Fed should continue to be cautious and not cut interest rates yet as the risk of inflation rising again remains.

In a press conference on June 27, Director General of the International Monetary Fund (IMF) Kristalina Georgieva said that the US Federal Reserve ( Fed ) should postpone interest rate reduction until at least the end of this year. The US is currently the only economy in the G20 with growth higher than before the pandemic. However, vibrant growth also means inflation risks.

"We realize there is a risk. Therefore, we think the Fed should keep the reference interest rate at the current level, at least until the end of 2024," Ms. Georgieva said. Interest rates in the US are currently about 5.25-5.5%, maintained since the middle of last year.

Kristalina Georgieva at a conference in Washington in June 2024. Photo: CNBC

The IMF forecasts the personal consumption expenditures (PCE) price index to be around 2.5% by the end of this year and reach the Fed’s 2% target by the middle of next year. The PCE is the Fed’s preferred inflation measure. However, the US Federal Reserve forecasts the index to reach 2% by 2026.

Georgieva said the US economic strength during the Fed's rate hike period was supported by a strong labor market and good productivity growth. However, the Fed still needs "clear evidence" that inflation is moving toward its 2% target.

However, the IMF remains optimistic about the trajectory of easing inflation in the US, due to signs of a tightening labor market and weakening consumer demand.

"I want to reiterate the lesson we've learned over the past few years, which is that these are uncertain times. Unexpected challenges lie ahead. But we believe the Fed will get through this with the same caution it has shown over the past year," Georgieva said.

The core PCE index (excluding food and energy prices) in May is forecast to increase slightly, at the lowest level in 3 years. Investors are currently closely following this data to evaluate the possibility of the Fed adjusting interest rates. Data from financial services firm LSEG shows that investors expect interest rates to decrease twice this year, while the Fed predicts only one policy adjustment.