IMF: Fed Must Tread Lightly in QE Drawdown

Though Ben Bernanke has hinted the Fed’s days of buying bonds are numbered, the International Monetary Fund is suggesting extreme caution with respect to the exit strategy of quantitative easing. Being rash or communicating poorly about its efforts could have “adverse global implications,” said a statement the monetary fund released today.

The IMF, in its annual report on the U.S. economy, said it believes Bernanke and the Fed won’t quit QE until the end of the year, and ought to tread lightly when it steps away from bond-buying and holding down interest rates. In fact, the IMF would like to see clear communication about what the Fed plans to do, and when.

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“Effective communication on the exit strategy…will be critical for reducing the risk of abrupt and sustained moves in long-term interest rates,” the report’s conclusion read. An imprecise calibration of the Fed’s exit from quantitative easing could lead to “adverse global implications, including…higher international financial market volatility.” Christine Lagarde, managing director of the IMF, addressed the media in Washington on the matter today.

Lagarde said communication is crucial “in order to monitor expectations and in order to reduce uncertainty, and this will certainly be seen in the weeks and months to come.” The IMF changed its forecast for U.S. economic growth to 2.7 percent in 2014, down slightly from an earlier projection of 3 percent. The IMF made it clear for the first time that it believes the automatic budget cuts that were part of the sequester will remain in place until the end of the year.

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The IMF is also expecting the Fed to lighten its QE efforts insignificantly this year, but cited investors’ pessimism following Bernanke’s comments as a clear risk to the U.S. economy’s growth. Conflicting signs from economic reports — including higher retail sales in May, plus lower consumer sentiment in June — are leading the IMF to believe higher payroll taxes and budget cuts are stalling growth and could provide “a stronger headwind to consumer demand over the next few quarters.”

The IMF also noted that things are not quite settled in Europe, either. Continued stress in euro zone could hit the U.S. in both the financial markets and in trade channels, the report cautions. Until there is more stability worldwide, the IMF suggests keeping stimulus going.

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