Those considerations,however,need to be balanced against the risk that wage or price inflation could accelerate as capacity constraints became more binding,forcing rates to rise faster than anticipated and potentially creating further market volatility and downward pressure on activity and employment.
On balance,therefore,further rate increases should be deferred,the IMF said,saying falling inflation,firmly anchored expectations,"strong Fed credibility,"evidence of a flat trade-off between inflation and slack,and continued uncertainties about the global outlook all argue in favour of a pause to further changes in monetary policy.
The Fed has maintained its credibility because it has resisted the regular and aggressive exhortations from Trump to cut rates and halt the shrinking of its balance sheet,with the accompanying regular attacks on its chairman,Jerome Powell.
While Trump denied at the weekend that he had canvassed sacking or demoting Powell recently (after widespread reports that he had),he said it had been proven that Powell made a mistake when the Fed raised US rates last year.
"I’m not happy with his actions. I don’t think he’s done a good job,"Trump said of Powell,who has said Trump doesn’t have the legal authority to sack or demote him and that he fully intends to serve out his four-year term. Trump claims otherwise,saying that he’d be able to demote Powell if he wanted to.
The Fed is trying to manage US monetary policy against a difficult and volatile background,partly attributable to the Trump administration’s tax,spending and trade policies. Trump is probably going to get the rate cut he wants,for the wrong reasons,as the Fed tries to counter the effects of his policies.
I’m not happy with his actions. I don’t think he’s done a good job.
Trump on Powell
As the IMF assessment says,the US fiscal position – US government debt of $US22 trillion,trillion-dollar deficits and a federal government debt-to-GDP ratio of 78 per cent and rising – may have supported US growth but it is unsustainable.
The US financial system appeared healthy but medium-term risks to financial stability were rising,with corporate leverage historically high,the share of non-performing commercial loans creeping up and underwriting standards weakening.
Asset valuations were rich but risk and term premia and the market pricing of volatility were at low levels and,as a result,financial conditions were"extremely loose".
The IMF said it was concerned there had been little institutional response to counter the growing risks to medium-term financial stability and instead there had been a steady easing of regulatory constraints (another Trump administration policy initiative) at a late stage in the cycle.
The Fed,with its limited policy instruments,can only respond to the out-workings of policies that may have provided a sugar hit to the US economy but threaten to destabilise its foundations. Pro-cyclical and pro-Trump monetary policies would only add to the levels of uncertainty in an economy already laden with risk.