The International Monetary Fund warned on Tuesday that upward risks to inflation were increasing, calling into question the prospect of the Federal Reserve cutting interest rates multiple times this year.
The International Monetary Fund said in its latest “World Economic Outlook” that “global deflation momentum is slowing, indicating bumps in the road ahead.” The report said that U.S. inflation rose month-on-month in early 2024, putting it on the path of quantitative easing lags behind other major economies.
The report comes as traders increase bets on a rate cut by the Federal Reserve in September. Wall Street has priced in a 100% chance of a rate cut at the Sept. 18 meeting, according to CME Group’s FedWatch tool. Traders also expect another rate cut in November.
However, IMF chief economist Pierre-Olivier Gurinchas told CNBC’s “Squawk on the Street” on Tuesday that the Fed would be most appropriate to cut interest rates once this year, stressing that the service remains stubborn. Industrial and wage inflation are complicating factors on the path to lowering inflation.
Gurinchas said that while strong wage and services inflation are “not necessarily a source of concern,” they are concerns about the future of the U.S. economy. Before his remarks, the U.S. Department of Labor said the annual increase in the consumer price index last month was the slowest since April 2021.
Despite the encouraging CPI report, Gurinchas said rising inflation earlier this year suggested the path to lower inflation and lower interest rates “may take longer than the market expects.”
“We’re more inclined to think there might be some cuts in the second half of the year, but maybe just one, or maybe 2024, maybe the rest of 2025,” Gurinchas said.
The International Monetary Fund predicts that the pace of deflation in developed economies around the world will slow down in 2024 and 2025 due to generally higher service sector inflation and commodity prices.
For the U.S. economy, due to cooling consumption and lower-than-expected growth at the beginning of the year, the agency lowered its 2024 growth forecast by 0.1 percentage points to 2.6%.
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