Central banks such as the Federal Reserve should be prepared to tighten policy in case inflation gets out of control, the International Monetary Fund says.
Central banks such as the Federal Reserve should be prepared to tighten policy in case inflation gets out of control, the International Monetary Fund warned Tuesday.
“While monetary policy can generally look through transitory increases in inflation, central banks should be prepared to act quickly if the risks of rising inflation expectations become more material in this uncharted recovery,” Gita Gopinath, the IMF’s economic counselor and director of research, said in executive summary accompanying the report.
The warning was part of the IMF’s quarterly update on global economic conditions. The fund slightly downgraded the outlook for global growth this year, but slashed the U.S. GDP forecast by a full percentage point from its July outlook, albeit to a still robust 6 percent that is ahead of the 5.2 percent forecast for all developed economies.
That type of policy carries some danger with it if inflation expectations start to surge, the IMF said. The Fed uses what it calls “forward guidance” to paint a clear picture to the public about what its future intentions are and what criteria it will use to change policy. In its warning, the IMF said communication will be key to avoid disruptive shocks to the economy form changes in policy course.
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