The International Monetary Fund issued a warning on Tuesday, stating that the risks of inflation rising have heightened, which could impact the possibility of multiple interest rate cuts by the Federal Reserve this year. In its most recent update of the World Economic Outlook, the IMF mentioned that the global disinflation trend is losing momentum, indicating potential obstacles ahead. The report highlighted that the U.S. experienced a rise in inflation earlier in 2024, lagging behind other major economies in terms of quantitative easing measures.
Market participants are increasingly anticipating a rate cut by the Fed in September. According to the CME Group’s FedWatch tool, there is a 100% probability priced in by Wall Street for lower rates at the meeting on September 18, with expectations of another rate reduction in November. However, IMF’s chief economist, Pierre-Olivier Gourinchas, expressed on CNBC’s “Squawk on the Street” that a single rate cut by the Fed this year would be most suitable, citing persistent service and wage inflation as challenges to achieving lower inflation.
Gourinchas noted that while strong wages and service inflation are not necessarily alarming, they are areas of concern for the U.S. economy. His remarks followed the U.S. Labor Department’s announcement that the consumer price index had the slowest year-over-year growth rate last month since April 2021. Despite the positive CPI report, Gourinchas indicated that the earlier uptick in inflation suggests that the journey towards lower inflation and rate cuts might take longer than anticipated by the markets.
The IMF predicts a deceleration in the disinflation rate across advanced economies globally in 2024 and 2025 due to elevated service inflation and commodity prices. Regarding the U.S. economy, the IMF revised its growth forecast downward by 0.1 percentage point to 2.6% in 2024 due to reduced consumption and slower growth at the beginning of the year.
