IMF’s Gourinchas: US Can Cut Rates Even as Inflation Risks Persist, According to Reuters

By Howard Schneider

JACKSON HOLE, Wyoming – The expected interest rate cuts from the U.S. Federal Reserve align with guidance from the International Monetary Fund (IMF), which emphasizes the importance of controlling inflation. However, recent assessments suggest that risks are increasingly concentrated on the labor market, according to IMF economic counselor Pierre-Olivier Gourinchas.

Gourinchas commented on remarks made by Fed chair Jerome Powell, stating that they reflect the IMF’s stance. "Inflation has been improving, and labor markets have shown signs of cooling," he noted. If the labor markets are no longer exerting upward pressure on inflation, the Fed might consider relaxing efforts to cool demand and move interest rates closer to neutral.

For over a year, the Fed has kept its benchmark interest rate within the 5.25% to 5.5% range, a position they believe is sufficient to dampen economic activity.

During a keynote address at the conference, Powell reinforced the idea that with inflation only slightly above the Fed’s 2% target and an uptick in the unemployment rate, adjustments in policy are warranted. These statements have strengthened expectations for an initial rate cut at the Fed’s upcoming meeting on September 17-18. Some economists speculate that this initial cut could be larger than the typical reduction, possibly a half-point, depending on the forthcoming report on August employment data.

Gourinchas cautioned against complacency regarding inflation, highlighting that service-sector prices continue to rise. He stated that the Fed must carefully calibrate the pace and extent of any rate cuts based on new economic data. "There is still some upside risk to inflation," he remarked.

Despite these challenges, Gourinchas acknowledged that the U.S. job market is cooling but from a position of strength with ongoing economic growth. He expressed confidence in the economy, stating, "I don’t think we are in a situation where recession is imminent," while also noting that the likelihood of a soft landing has increased and remains the baseline expectation.