IMF says faster Fed taper ‘well-calibrated’ response to price pressures

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FILE PHOTO: The IMF logo is seen outside the headquarters building in Washington

By David Lawder

WASHINGTON – The U.S. Federal Reserve’s decision to accelerate reduction of bond purchases is “a well-calibrated” response to rising wage and price pressures but increases risks for emerging markets, IMF spokesman Gerry Rice said on Thursday.

Rice told a news briefing a day after the Fed signaled three rate hikes in 2022 and said it would end pandemic-era bond purchases in March that the faster pace of Fed monetary policy normalization increases risks faced by emerging market and developing countries that are reliant on dollar funding.

“The Federal Reserve has announced a well-calibrated, proportionate response to rising wage and price pressures by accelerating the reduction in its asset purchases and signaling a more front-loaded path for the federal funds rate,” Rice said. “Continuing to set policy in such a data dependent way will help keep inflation expectations anchored.”

“However, this faster pace of Fed normalization does increase the risks faced by countries reliant on dollar funding, especially emerging and developing economies,” Rice said.

The IMF has grown more concerned in recent weeks about inflation leading to a more abrupt tightening of monetary policy in advanced countries, and has urged central banks to contain inflation before wage-price spirals take hold.

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On Thursday, the Bank of England became the world’s first major central bank to raise interest rates since the coronavirus pandemic hammered the global economy, lifting its Bank Rate to 0.25% from 0.1%.

The Fund on Tuesday had urged the Bank of England to avoid an inaction bias when it comes to raising interest rates, forecasting British inflation at a 30-year high of 5.5% next year, and called for the bank to begin carefully communicating an approach that includes more frequent monetary policy tightening.

(Reporting by David Lawder; Editing by Andrea Ricci)