IMF Warns about Unintended Consequences of Fed’s Policies

The IMF conducts regular official staff missions to member countries “in the context of a request to use IMF resources.” It isn’t at all obvious why that was necessary to do for the US. However, the IMF today posted its “Concluding Statement of the 2013 Article IV Mission to The United States of America.” The IMF’s staff gave US policymakers some free advice on their free-spending fiscal policies and free credit policies. Here is what they had to say about the Fed:

The highly accommodative monetary policy stance has provided important support to the U.S. and global economic recovery, and under staff’s growth projections a continuation of large-scale purchases through at least end-2013 is warranted. However, a long period of exceptionally low interest rates may entail potential unintended consequences for domestic financial stability and has complicated the macro-policy environment in some emerging markets.

While the Fed has a range of tools to help manage the exit from its current highly accommodative policy stance—including adjusting interest on excess reserves and conducting reserve-draining operations with an expanded list of counterparties—unwinding monetary policy accommodation is likely to present challenges. The large volume of excess reserves and the segmented nature of U.S. money markets could affect the pass-through of policy rates to short-term market rates.

At the same time, effective communication on the exit strategy and a careful calibration of its timing will be critical for reducing the risk of abrupt and sustained moves in long-term interest rates and excessive interest rate volatility as the exit nears, which could have adverse global implications, including a reversal of capital flows to emerging markets and higher international financial market volatility.

Thanks for the helpful advice! By the way, the adverse unintended consequences may have started to emerge for emerging economies, as their bond yields have been soaring recently while their stock markets have been plunging.