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IMF suggests U.S. Fed temporarily overshooting inflation target

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Staff Writer | July 14, 2016
International Monetary Fund (IMF) called on the U.S. Federal Reserve to temporarily overshoot its inflation target in order to guard against disinflation and policy reversal risks.
IMF
Economy in America   To gradually increase the interest rates
"Given the likelihood and severity of downside risks to inflation, the potential for a drift down in inflation expectations, the path for policy rates should accept some modest, temporary overshooting of the Federal Reserve' s inflation goal," said the IMF in Article IV Consultation report with the U.S.

However, the report quoted U.S. authorities as saying that the there was no intention to engineer an overshoot the inflation target, as such move could force the Fed to raise interest rates more quickly, which could be disruptive and undermine the Fed' s achievement of its dual mandates of maximum employment and stable prices.

The U.S. authorities said that it likely would be appropriate to gradually increase the interest rates in the coming months, if incoming data shows economic growth continuing to pick up, labor market conditions continuing to strengthen, and inflation making progress toward 2 percent, according to the report.

The IMF expected the U.S. economy to grow 2.2 percent in 2016 and 2.5 percent in 2017, saying that risks to the growth outlook are tilted to the downside, such as further appreciation of U.S. dollar.

The uncertainty surrounding the U.K. referendum could fuel financial market volatility or push up the U.S. dollar further, said the report. However, the net effect of the Brexit on U.S. growth is "pretty negligible" , said Nigel Chalk, the IMF' s mission chief for the U.S., at a conference call on Tuesday.

In the long run, issues, such as low productivity growth, falling labor force participation, and rising poverty and wealth inequity, will continue to weigh on the U.S. economic prospects, said the IMF.

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