According to the latest update of the World Economic Outlook by the IMF, there are indications that the pace of global disinflation is slowing down, which suggests forthcoming challenges. The report underscored that the inflation spike in the U.S. earlier this year has caused it to lag behind other major economies in terms of easing monetary policies, as detailed in the report.
At the same time, traders are increasingly expecting a decrease in interest rates by the Fed in September. Based on the FedWatch tool from the CME Group, the market has already fully priced in a rate cut during the meeting scheduled for September 18. Traders are also anticipating another rate reduction in November.
Nevertheless, the IMF’s chief economist Pierre-Olivier Gourinchas stressed on CNBC’s “Squawk on the Street” that a sole interest rate reduction by the Fed this year would be the most suitable measure, pointing out persistent challenges like services and wage inflation that are obstructing the path to lowering overall inflation.
Gourinchas observed that despite the strong wages and service inflation being “not necessarily troubling,” they are still crucial issues for the U.S. economy. His statements followed the release of a report by the U.S. Labor Department revealing that the consumer price index had the slowest year-over-year growth rate since April 2021 last month.
Despite the positive Consumer Price Index (CPI) report, Gourinchas proposed that the earlier inflation surge this year indicates that achieving lower inflation levels and implementing rate cuts “might require more time than what the markets anticipate.”
“We envisage there might be some interest rate reductions towards the close of this year, potentially just one in 2024 and perhaps more cuts in 2025,” Gourinchas mentioned.
On a global level, the IMF predicts a deceleration in disinflation rates in 2024 and 2025 across developed economies due to increased service inflation and commodity prices.
Shifting focus to the U.S. economy, the IMF revised its growth forecast downward by 0.1 percentage points to 2.6% in 2024 due to reduced consumption and slower growth than expected in the beginning of the year.
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