IMF’s Gourinchas says US right to cut rates, although inflation risk not gone By Reuters

By Howard Schneider

JACKSON HOLE, Wyoming (Reuters) – The imminent interest rate cuts planned by the U.S. Federal Reserve are “in line” with advice from the International Monetary Fund, which has prioritized keeping inflation under control but now sees risks shifting to the labor market , IMF economic advisor Pierre-Olivier Gourinchas said on Friday.

“What was telegraphed by (Fed Chairman Jerome) Powell today is very much in line with what we’ve been saying,” Gourinchas said on the sidelines of a Fed economic conference in Kansas City. “Inflation has improved and labor markets have shown signs of cooling … If labor markets stop contributing to inflationary pressures … then you might ease the contraction in aggregate demand a bit and bring (the policy interest rate ) back. closer to neutral”.

The Fed has kept its benchmark interest rate in the range of 5.25 percent to 5.5 percent for more than a year, a level that policymakers see as limiting economic activity.

In keynote remarks at the conference on Friday, Powell said bluntly that with inflation just half a point above the Fed’s 2 percent target and the unemployment rate rising, “the time has come for policy to adjust,” noting that he cemented expectations for a first interest rate cut at the September 17-18 Fed meeting. Depending on the outcome of an upcoming jobs report in August, some economists anticipate that the initial cut may be as much as a half-point cut larger than usual.

The US should not be “satisfied” that inflation is gone, Gourinchas said, noting that prices in the services sector are still rising and the Fed will need to calibrate the pace and extent of rate cuts with incoming economic data.

“There is still a risk of rising inflation,” he said.

However, it was also clear that the US labor market was cooling, Gourinchas said, albeit from a position of strength and continued economic growth.

“I don’t think we’re in a situation where recession is imminent” in the U.S., Gourinchas said, while the odds of a soft landing “have increased and that remains our baseline.”