IMF says U.S. should tighten fiscal policy to help cut persistent inflation

FILE PHOTO: International Monetary Fund logo is seen outside the headquarters building

By David Lawder

DETROIT (Reuters) -The International Monetary Fund said on Friday U.S. interest rates will likely need to remain higher for longer to tame inflation, and Washington needs to tighten fiscal policy to bring down its federal debt.

The IMF said in a statement issued after its "Article IV" review of U.S. policies that the U.S. economy has proved resilient in the face of tighter monetary and fiscal policy, but this means that inflation has been more persistent than anticipated.

The fund's review included a U.S. full-year growth forecast of 1.7% for 2023, slightly above its 1.6% estimate in April, and lower output of 1.2% on a fourth-quarter comparison basis.

It forecast the federal funds rate peaking this year at 5.4% - above the nominal 5.25% Fed rate - easing to 4.9% in 2024.

"While core and headline PCE inflation are expected to continue falling during 2023, they will remain materially above the Fed's 2% target throughout 2023 and 2024," the IMF said.

IMF Managing Director Kristalina Georgieva told a news conference the U.S. government needed to reduce deficits, notably with higher tax revenues.

"The sooner this adjustment is put in place, the better. It is worth noting that the fiscal adjustment can be front loaded, and by doing so it would help the Fed in its efforts to reduce inflation."

Georgieva said she hoped that a "12th-hour" resolution to the U.S. debt ceiling crisis will be reached in Washington, avoiding a catastrophic default that would add more shocks to the world economy.

"The U.S. Treasury market is the anchor of stability for the global financial system. You pull the anchor, the world economy, the ship on which we all travel, is in choppy and even worse, unchartered waters," Georgieva said, adding that this would come when many economies were contracting."

She also issued a plea to U.S. lawmakers to come up with an alternative way to regulate debt that eliminates debt ceiling brinkmanship through the annual appropriations process.

"Can you please come up with a different way in which you address this issue?" Georgieva said.

(Reporting by David Lawder; Editing by Mark Porter and Richard Chang)