The International Monetary Fund warned on Tuesday that upside risks to inflation had increased and questioned the prospect of multiple interest rate cuts by the U.S. Federal Reserve this year.
In its latest update on the World Economic Outlook, the IMF said “the momentum of global disinflation is fading, pointing to bumps along the way.” The rise in sequential inflation in the US in early 2024 has put the country behind other major economies on the path to quantitative easing, the report said.
The report comes as traders increase their bets on a Fed rate cut in September. According to CME Group's FedWatch tool, Wall Street has priced in a 100 percent probability of lower rates at the Sept. 18 meeting. Traders also expect another rate cut in November.
However, IMF chief economist Pierre-Olivier Gourinchas said on CNBC's “Squawk on the Street” on Tuesday that a Fed rate cut would be most appropriate this year, stressing that still-stubborn services and wage inflation make the path to lower inflation difficult.
Gourinchas said that while robust wage and services inflation was “not necessarily a cause for concern,” it was still a concern for the U.S. economy. His comments came after the U.S. Labor Department said the consumer price index rose last month on a year-on-year basis at the slowest pace since April 2021.
Despite the encouraging consumer price index report, Gourinchas said the rise in inflation earlier this year suggested that the path to lower inflation and interest rate cuts “may take a little longer than markets might expect.”
“We tend to think there could be some cuts in the second half of the year, but maybe just one, or in 2024 and maybe for the rest of 2025,” Gourinchas said.
The IMF forecasts a slowdown in disinflation in industrialized nations worldwide in 2024 and 2025 due to generally high services inflation and high commodity prices.
Looking at the US economy, the financial institution lowered its growth forecast by 0.1 percentage points to 2.6 percent in 2024, as consumption is slowing and growth was slower than expected at the beginning of the year.
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