FXStreet (Guatemala) – Analysts at Brown Brothers Harriman noted yet more unsolicited advice from the IMF.
Key Quotes:
“The leadership at the Federal Reserve has consistently signalled its intention to lift rates this year. It is conditioned on the labor market continuing to absorb the slack, and provided the officials can be “reasonably confident” that the inflation target will be reached on a medium term.
The IMF has argued against this. It has suggested that the Fed wait until next year. Despite the lag time between the implementation of monetary policy and its economic effect, the IMF thinks inflation needs to rise more before a rate hike is appropriate. Temporal inconsistencies do not seem to bother it. If the Fed were to wait, forcing what some officials have suggested would be a steeper increase later, the IMF would likely criticize it for waiting too long.
The IMF has come out with more unsolicited advice. A new staff paper suggests the Fed should drop the dot-plots and offer a single staff forecast similar to the ECB. The paper suggests this would improve the effectiveness of monetary policy.
Doesn’t the IMF have other more pressing issues that to wade into a largely technical and idiosyncratic debate, not about policy but how that policy is communicated? It is difficult to prove or disprove that dot plots weaken the effectiveness of monetary policy. We continue to suggest that investors do best by focusing on the Fed’s leadership from which policy emanates (Yellen, Fischer and Dudley). It is true that their dots are not recognizable, but their other communication vehicles indicate that they are committed to raising rates this year.
We argue that telling investors what it plans on doing and then doing it (see the tapering experience as a case study), that makes for effective and credible monetary policy. If the Fed were to listen to the IMF’s staff advice, and not raise rates until next year, wouldn’t that undermine the Fed’s effectiveness in this context? Could it really be repaired by offering a single forecast?”
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