The IMF said on Friday that it continues to believe that the Federal Reserve could start cutting interest rates later this year. However, it should stay cautious despite the decline in inflation, which raised expectations for an earlier rate cut. In a recent news briefing, Julie Kozack, IMF director of the communications department, stated that disinflation in the U.S. is in progress after the consumer price index fell 0.1 percent in June, marking its first monthly drop in four years.
“We do support the Fed’s data-dependent and cautious approach to monetary policy. We also do expect that the Fed will be in a position to reduce interest rates later this year, and that assessment continues to hold,” Kozack said during the briefing.
Fiscal deficit and debt remain a concern
However, she urged the U.S. government to reduce its high fiscal deficit and put debt on a downward trajectory, reiterating the IMF’s suggestion following the completion of the staff’s recent 2024 Article IV Mission to the country.
“Action is needed by the United States to reduce its high fiscal deficit and to put debt on a downward trajectory. I should say that we have been highlighting these concerns for quite some time,” she added.
Kozack stated that, in 2021 and 2022, the U.S. passed significant fiscal legislation, which will likely have a lasting positive impact on reshaping the U.S. economy. At the same time, the fiscal deficit is now too high. “It is the time now especially that the economy is strong to take action to put debt-to-GDP on a decisive downward path,” she said.
Kozack added that in the fiscal year 2023, net interest payments of the U.S. federal government amounted to 2.4 percent of GDP. In addition, the IMF expects them to rise to 3.2 percent of GDP in the current fiscal year 2024, primarily due to higher interest rates.
Read: U.S. inflation plunges to 3 percent, fueling bets on imminent Fed rate cuts
High interest rates raise U.S. deficit and debt
Interest rates in the U.S. have remained at a 22-year-high of 5.25 percent to 5.5 percent. Due to setbacks in inflation progress earlier this year, the Fed will likely cut rates later than markets previously expected, increasing the burden on the U.S. deficit and debt.
The Fed’s next meeting is on July 30-31. The probability of the Fed maintaining rates at the July meeting is over 95 percent, according to CME’s FedWatch Tool.
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