(Bloomberg) — The head of the International Monetary Fund said the Federal Reserve and other major central banks face more risks by easing monetary policy too early rather than too late, but stressed the Fed shouldn’t hesitate to cut interest rates when the data says the time is right.
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“Central banks need to be guided by data, not by exuberant expectations of markets,” Managing Director Kristalina Georgieva said in a briefing on Thursday. “At this time in the cycle, there is risk of premature loosening.”
Her comments come a day after Fed Chair Jerome Powell signaled the US central bank was done with aggressive tightening campaign while seeking to tone down expectations that a cut was possible as soon as next month. Fed officials on Wednesday voted to hold their benchmark rate steady at a 5.25%-5.5% range, a 22-year high.
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Market odds for a rate reduction in March had risen above 50% before his comments but have since eased back. Economists at Goldman Sachs Group Inc., Barclays Plc and Bank of America Corp. also pushed their forecasts for cuts back from March to as far out as June.
Georgieva, who said the timing on Fed easing is likely “a matter of months,” said the fund sees the risks are higher from premature easing rather than being slightly late. Moving too soon can reverse gains on fighting inflation, as well as on public expectations of future price pressures, which can drag on consumer and investor confidence.
However, she cautioned that holding rates elevated too long risks both slowing the US economy too much and harming emerging markets that lower rates by impacting their currencies “in a somewhat negative way.”
“Don’t keep it tight if you don’t need to,” she said. “Look at the data, act on the data.”
The Fed’s preferred gauge of underlying inflation cooled to an almost three-year low in December. So-called core inflation was up 1.9% in December on a six-month annualized basis, trailing the Fed’s 2% target for a second month.
–With assistance from Reade Pickert.
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