Fed raising interest rates to bring US economy back into balance, IMF says

People shop in a Target store in Los Angeles, California. Getty

People shop in a Target store in Los Angeles, California. Getty

The US Federal Reserve is raising interest rates to reinstate price stability and to balance the labour market, the International Monetary Fund has said.

IMF analysis showed that staying the course and keeping interest rates higher in 2023 will control inflation and help to bring the economy back into balance.

The elevated rates will temporarily increase unemployment, but they will pave the way for stable inflation and sustainable economic growth, which will ultimately help create more jobs in the future, said Andrew Hodge, senior economist in the IMF’s Western Hemisphere department.

Earlier this month, the Fed raised interest rates by 25 basis points, while indicating that more increases are to come.

This was its eighth rise since last year. The latest announcement brought the Fed’s target range to between 4.50 per cent and 4.75 per cent — about 50 basis points away from its end-of-year projection of 5.1 per cent.

The central bank said “ongoing increases” would be needed to bring inflation down to its long-term 2 per cent goal.

The Fed’s mandate is to achieve price stability and maximum employment, Mr Hodge said.

”The Fed could achieve these goals by raising interest rates to a peak of 4 to 5 per cent, sustaining that for around one to one and a half years, taking into account workers’ strong bargaining position and the high number of vacancies per unemployed worker.

“The higher interest rates would weaken the demand for workers and increase unemployment modestly.

“This would reduce the pressure for large wage and price increases, particularly in the services sector, helping to lower inflation.”’

US employers added far more jobs than forecast last month, underlining the resilience of the labour market despite aggressive actions from the Federal Reserve to cool inflation.

Total non-farm payrolls added 517,000 jobs in January, data from the Labour Department showed, far exceeding a Reuters estimation of 185,000. It also surpassed the number of jobs added in January 2022 by 13,000.