May 26, 2023
IMF Urges US to Raise or Suspend Debt Cap, Says Risk Avoidable
(Bloomberg) -- The International Monetary Fund urged the US to immediately raise or suspend its debt limit, and warned that getting “stubbornly high” inflation back to the Federal Reserve’s 2% goal will require elevated interest rates through much of 2024.
“Brinkmanship over the federal debt ceiling could create a further, entirely avoidable systemic risk to both the US and the global economy at a time when there are already visible strains,” the IMF said in a statement Friday. “To avoid exacerbating downside risks, the debt ceiling should be immediately raised or suspended by Congress.”
The fund issued the warning in the concluding statement of its article IV consultation, the IMF’s assessment of countries’ economic and financial developments following meetings with lawmakers and public officials.
Republican and White House negotiators are moving closer to an agreement to raise the debt limit and cap federal spending for two years, according to people familiar with the matter, as time grows short to avert a catastrophic US default. All this as the world’s biggest economy contends with five percentage points of interest-rate increases in little over a year in the Fed’s most aggressive tightening campaign since the 1980s as it seeks to curb inflation.
The two sides have narrowed differences in talks over recent days, according to the people, though the details agreed to are tentative and a final accord is still not in hand. They have yet to agree on the amount of the cap.
Treasury Secretary Janet Yellen indicated to Congress earlier this month that the department could run out of sufficient cash as soon as June 1.
The IMF sees the US inflation rate remaining above the Fed’s 2% medium-term target throughout 2024, Managing Director Kristalina Georgieva told reporters.
“Bringing inflation firmly back to the 2% target will require an extended period of tight monetary policy,” she said. “We see the federal funds rate remaining at 5.25% to 5.5% until late 2024 — in other words, rates will need to be somewhat higher for longer.”
That level represents a quarter-point increase from the Fed’s current rate.
What’s more, the IMF indicated there’s a good chance rates may have to rise even further to slow the economy and tame inflation.
“With a large share of household and corporate debt contracted at relatively long duration and fixed rates, household consumption and corporate investment have proven less interest-sensitive than in past tightening cycles,” the fund said in its report. “This creates a material risk that the Federal Reserve will have to raise the policy rate by significantly more than is currently expected to return inflation to 2%.”
The IMF also cautioned that higher interest rates for longer could increase the likelihood of seeing larger, more systemic balance sheet problems at banks. Recent bank failures of US lenders could potentially be a prelude to “more serious and ingrained” systemic financial stability problems, it said.
(Updates with details on risks from higher rates from 10th paragraph.)
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