Fed communication, timing key to reduce risk of stimulus exit

Los Angeles TimesJuly 27, 2013 

WASHINGTON -- Clear communication and proper timing are key to the Federal Reserve ending its unprecedented stimulus efforts without damaging the improving U.S. economic recovery, the International Monetary Fund said Friday.

With Fed policymakers set to begin tapering the central bank's monthly bond purchases as soon as September, the IMF noted there were "significant challenges. Among those were "risks of market reactions leading to excessive interest rate volatility that could have adverse global implications."

"Effective communication and careful timing will be critical to avoid disruptions, for both the United States and other countries," the IMF said in its annual assessment of the U.S. economy.

The U.S. recovery, though still modest, "is gaining ground," the IMF said. The housing market rebound and the Fed's easy-money policies are major factors, helping to offset tax increases and federal spending cuts this year.

The IMF reiterated its forecast this month that the U.S. economy would expand at a 1.7 percent rate this year, improving to 2.7 percent next year. Those projections were part of the organization's updated worldwide growth forecast.

But on Friday, the IMF released a 63-page assessment of the U.S. economy. The report was more upbeat than one Thursday on prospects for the Eurozone, which is struggling to emerge from its longest-ever recession.

The IMF warned that the pace of fiscal cutbacks in the United States, through tax in

creases that kicked in Jan. 1 and the sequestration budget cuts that began two months later, was too fast given the "fragile recovery."

Although the tax hikes and reduced spending have lowered the U.S. budget deficit, "the main short-term priority is to replace the sequester with a back-loaded set of revenue-raising and targeted expenditure-saving policies," the IMF said.

Longer-term, the biggest challenge was a successful exit by the Fed from the stimulus policies it began in 2008.

The IMF warned Thursday that the Fed pullback could reignite the European debt crisis by causing interest rates to shoot up.

Rates already have risen sharply in recent weeks as Fed Chairman Ben S. Bernanke and other officials began talking about reducing one key stimulus program, the $85 billion in monthly bond purchases.

A "faster-than-projected increase in interest rates" would hurt the U.S. recovery and pose a risk to global economic growth, the IMF said.

It noted the "increase in market turbulence" that began in late May after the Fed said it could start reducing the monthly bond purchases later this year if the economy and jobs market continued to improve as forecast.

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