IMF Cuts U.S. 2014 Growth Forecast to 2%
International Monetary Fund has cut the growth forecast of US to 2% courtesy the forecasted expectation of country’s inflation to be under the Federal Reserve target rate of 2% through 2017. IMF in their statement has cited that although the US economy is setting up for recovery, but the Federal Reserve should keep the interest rates to the present range of 0-0.25% for some time as of now. The economic body has cited the harsh cold weather conditions, the continued struggle of US Housing market and the weak export numbers, as the factors for the cut in the economic growth rate of the country by 0.8% this year, bringing the growth forecast to 2%. However, IMF has maintained a 3% growth outlook for the next year as they expect that a meaningful economic rebound is surely under the way for US economy but in order to attain the target growth rate the Fed and US Officials must weed out the economic slacks and should take relevant steps in the near term to promote economic stimulus.
Out of all the suggested measures, IMF said that the US government must take measures to reduce their spending and increase their revenue so as to avoid the pressure building on the government treasury. Furthermore, to decrease the level of unemployment and the existing slack in the labor market and to improve the consumer inflation, the US government should enhance their spending on near-term spending on infrastructure, education, job training and child-care subsidies. In this way, a government stimulus will be created and will take the burden off the Fed and reduce the risk that easy-money policies fuel too much risky investing.
However, IMF doubts that US political environment will not agree over this approach easily at least in short term. This means that the Federal Reserve will continue to stimulate the economy through its cheap cash policies that will further fuel the instability in the financial markets. Furthermore, the IMF warned that the US markets do not seem to be adequately factoring in "substantive ambiguities" in the economic outlook that could force the Fed to adjust its monetary policies and even if the inflationary pressure rise above the central bank’s target, Federal Reserve will accommodate the increase in prices with the economy still operating below the full employment levels. This is the reason that IMF has cut short the growth expectations in the United States.
As for the future, IMF warned that whenever Federal Reserve will decide to increase the interest rates, this could impact the economic recovery of the nation, harm employment opportunities and may yet again affect the global economy. The diagram below is just a small illustration as how the bond market will behave when the interest rates in US will rise:
The above figure indicates that with zero percent short term interest rate approach, Fed allowed the bond yields to fall to historic lows, however, once the interest rates will start increasing, the artificial demand will no longer sustain in the market and bond yields will rise sharply with fall in their price levels. Overall, any increase in interest rates by Fed will depress the bond market performance.
Brown, Keith. Fixed Income Securities. Boston: CFA Institute, 2011.
Talley, Ian. IMF Cuts U.S. 2014 Growth Forecast to 2%. 16 June 2014. 25 June 2014 <http://online.wsj.com/articles/imf-cuts-u-s-2014-growth-forecast-to-2-1402925865>.