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July 31, 2000

IMF Urges Fed To Push Interest Rates Higher
By Dow Jones Business News Service

Heed That Advice ... Weiss comments

WASHINGTON -- The International Monetary Fund Friday urged the Federal Reserve not to delay raising interest rates, warning that to do so could necessitate harsher action down the road.

In its so-called Article IV review of the U.S. economy, the IMF's executive board praised the Fed for its string of interest rate increases since June 1999, but said further tightening may be required 'to ensure that inflation remains under control.'

The Fed has lifted interest rates six times in just over a year, boosting its federal funds target rate to 6.50% from 4.75%, although the central bank chose to leave rates unchanged at its June policy meeting. In Congressional testimony this week, Federal Reserve Chairman Alan Greenspan suggested he believes the economy may have slowed enough to avoid another interest rate hike, but said the decision will depend on the latest economic figures.

Though the IMF admitted that the need for a seventh rate hike depends on the economy's response to the Fed's past action, it urged the central bank not to wait for inflation to emerge. 'While monetary-policy tightening in the United States has inevitable, potentially adverse, spillover effects on the rest of the world, the impact would be even more detrimental if the U.S. authorities unduly delay policy action, and subsequently tighten monetary policy more sharply once inflationary pressures strengthen,' the IMF said.

In response to Greenspan's Congressional testimony last week, the IMF issued some sound advice to the Fed: 'Don't sit back on your haunches and wait for inflation to rear its ugly head.' Last week's stronger-than-expected GDP report shows how quickly new information can change the economic outlook. The Fed must recognize that, even though the economy is slowing, inflationary pressures have been building and only additional interest rate hikes will be able to contain these pressures.

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