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Tuesday, 18 June 2013 01:07
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IMF suggests US unemployment won't fall below 6.5% in even 2014, so Fed will continue to buy bonds

Two points are worth stressing in the IMF’s latest Article IV consultation with the US government. One, despite the strong comeback in economic growth, the IMF estimates the impact of the compulsory sequester will hit overall growth. So, from a 2.2% growth in 2012, the IMF estimates 2013 growth will be a lower 1.9%. Given this, the obvious suggestion is that US politicians need to get together to sort out their differences so that the compulsory sequester is replaced by more sensible cuts and which preferably are backloaded.

The second major issue, and one that affects emerging markets like India especially, relates to the monetary stimulus. Since markets the world over have already reacted badly to the view that the Fed will lower bond purchases soon, the IMF points out that more clarity is needed on the Fed’s exit strategy. Indeed, a sharp hike in interest rates and financial market volatility can also hurt US recovery—too sharp a hike in interest rates and US banks, for instance, will suffer balance sheet losses on the bonds they hold. Which is why the IMF’s projections on US unemployment are likely to be more discussed than its view on economic growth—as more unemployed come back to the work force with the economy looking up, IMF projects US unemployment at 7.2% in 2014. Which means the Fed’s bond-buying programme isn’t going to come to a halt any time soon.


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