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(Bloomberg) — While US inflation is on course to return to the Federal Reserve’s 2% target in the first half of next year, policymakers have little room to cut interest rates this year, according to the International Monetary Fund.
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IMF staff expect a single rate reduction by the end of 2026, according to the Washington-based lender’s annual review of US economy, known as an Article IV consultation. “On balance, staff see little scope to lower the policy rate over the coming year.”
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“A larger monetary easing would need to be predicated on a material worsening in labor market prospects and an absence of increasing inflationary pressures, including from higher near-term inflation expectations due to rising oil and commodity prices,” the IMF staff said in the statement.
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IMF executive directors, in a separate statement on the Article IV, said that with the Fed’s current policy stance being close to neutral, “there is little room to cut interest rates in 2026, particularly given the rise in energy prices, the likely passthrough to core inflation and the upside risks to global commodity prices that are likely to further delay the return to the inflation target.”
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Thursday’s release was a full version of the Article IV report, following a summary that was published in February.
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Under IMF staff’s baseline outlook, the Fed’s benchmark rate will reach a 3.25% to 3.5% target by year-end. It’s currently at 3.5% to 3.75%. “This would allow the economy to return to full employment and 2% percent inflation” by the first half of 2027, the fund said.
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