U.S. Federal Reserve Rate Cuts Align with IMF Advice

By Howard Schneider

JACKSON HOLE, Wyoming (Reuters) – The imminent rate cuts planned by the U.S. Federal Reserve are “in line” with International Monetary Fund advice that emphasizes controlling inflation while addressing shifting risks toward the labor market, according to IMF economic counselor Pierre-Olivier Gourinchas during a Kansas City Fed economic conference.

Gourinchas stated, “What was telegraphed by (Fed chair Jerome) Powell today is very much in line with what we’ve advocated. Inflation has been improving and labor markets have shown signs of cooling… If labor markets are not contributing to inflation pressures anymore, then you might ease a little bit on cooling aggregate demand and bring (the policy rate of interest) back closer to neutral.”

The Fed has maintained its benchmark interest rate in the 5.25% to 5.5% range for over a year, a level that policymakers believe is curbing economic activity.

In his keynote remarks, Powell indicated that with inflation just a half-point above the Fed’s 2% target and the unemployment rate rising, “the time has come for policy to adjust,” which has solidified expectations for an initial rate cut at the Fed’s meeting on Sept. 17-18. Some economists predict that the upcoming cut may be a larger-than-usual half-point reduction, depending on the August jobs report.

Gourinchas warned that the U.S. should not be “complacent” about inflation as service-sector prices continue to rise, noting that the Fed will need to adjust the pace and extent of rate cuts based on incoming economic data. “There is still some upside risk to inflation,” he remarked.

Nevertheless, Gourinchas acknowledged the cooling U.S. job market, which is occurring from a position of strength and ongoing economic growth. He expressed that he does not foresee an imminent recession in the U.S., while the chances of a soft landing “have increased and that remains our baseline.”