As stated in the latest update of the World Economic Outlook by the IMF, there are indications that the global trend of disinflation is decelerating, signaling potential hurdles ahead. The report underlined that the surge in inflation in the U.S. earlier this year has caused it to lag behind other leading economies in terms of relaxing monetary policies.
Meanwhile, there is a growing anticipation among traders for a rate reduction by the Fed in September. According to the FedWatch tool by the CME Group, the market has fully factored in a cut in rates at the meeting scheduled for September 18. Traders are also looking forward to another rate reduction in November.
However, during an appearance on CNBC’s “Squawk on the Street,” the chief economist of the IMF, Pierre-Olivier Gourinchas, emphasized that a single rate cut by the Fed this year would be the most appropriate, citing persistent challenges such as services and wage inflation hindering the path to overall inflation reduction.
Gourinchas pointed out that while strong wages and service inflation are not necessarily alarming, they are fundamental issues for the U.S. economy. His comments followed the release of the U.S. Labor Department’s data, which showed that the consumer price index had the slowest year-over-year growth rate since April 2021 last month.
Despite the encouraging Consumer Price Index (CPI) report, Gourinchas suggested that the earlier spike in inflation this year indicates that achieving lower inflation levels and implementing rate cuts might require more time than what the markets are expecting.
“We believe there could be some rate reductions towards the end of this year, perhaps just one in 2024 and potentially further decreases in 2025,” Gourinchas stated.
Internationally, the IMF foresees a slowdown in disinflation rates in 2024 and 2025 across developed economies due to rising service inflation and commodity prices.
With a focus on the U.S. economy, the IMF has adjusted its growth forecast downwards by 0.1 percentage point to 2.6% in 2024 due to decreased consumption and slower growth than originally anticipated in the early months of the year.
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