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While the IMF has said it broadly shares the assessments of the Fed and other economists that the current global wave of price increases will eventually subside, it noted that there is “great uncertainty” around these predictions.
The cautionary tone mentioned the United States, as well as the United Kingdom and other developed economies, as places where “the risk of inflation is skewed upward.”
“While monetary policy can generally cope with transient increases in inflation, central banks must be prepared to act quickly if the risks of rising inflation expectations become greater in this unexplored recovery,” Gita said. Gopinath, IMF Economic Advisor and Research Director. in the summary accompanying the report.
“Central banks should plan contingency actions, announce clear triggers and act in accordance with this communication,” she added.
Fed officials have said the main weapon to fight inflation is rising interest rates. The US central bank has not hiked rates since 2018.
With inflation reaching its highest level in 30 years in the United States, the Fed must have wondered when to start withdrawing the extraordinary political assistance it has provided since the start of the pandemic Covid crisis in early 2020.
Although the IMF did not choose the Fed, much of its assessment of inflation indirectly concerns a major policy adjustment by the US central bank in September 2020, when it said it would be ready to allow inflation to rise higher than normal in the interest of generating full and inclusive employment.
This type of policy carries some danger if inflation expectations start to rise, the IMF said.
“In contexts where inflation is rising in a context of still low employment rates and where the risks of unanchoring expectations become real, monetary policy may need to be tightened to stay ahead of price pressures, even if this is the case. delays the resumption of employment, ”the report said. .
Waiting for employment to rebound more strongly “runs the risk of inflation rising in a self-fulfilling manner,” which would then undermine Fed policy, the IMF said.
The Fed uses what it calls “forward guidance” to paint a clear picture to the public of its future intentions and the criteria it will use to change policy. In its warning, the IMF said communication will be key to avoiding disruptive shocks to the economy in the form of policy changes.
“The unprecedented economic situation makes transparent and clear communication on the outlook for monetary policy even more critical,” the report said.
JPMorgan Chase CEO Jamie Dimon is among those seeing inflation cool, saying on Monday he expects the supply chain issues that have contributed to the price spike to dissipate in 2022.
More information on the current inflation situation in the United States will be released on Wednesday with the release of the Consumer Price Index for September. Economists predict that prices for a basket of daily consumer goods rose 0.3% for the month, bringing the year-over-year gain to 5.3%.
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