IMF chief Gourinchas believes key interest rate cut in the US is right, but inflation risk not eliminated

By Howard Schneider

JACKSON HOLE, Wyoming (Reuters) – The U.S. Federal Reserve's planned interest rate cuts are “in line” with the recommendation of the International Monetary Fund, which places great emphasis on controlling inflation but now expects risks to shift to the labor market, IMF economic adviser Pierre-Olivier Gourinchas said on Friday.

“What (Fed Chairman Jerome) Powell signaled today is broadly consistent with what we have been advocating,” Gourinchas said on the sidelines of a Fed economic conference in Kansas City. “Inflation has improved and labor markets have shown signs of cooling … If labor markets no longer contribute to inflationary pressures … then you could ease the cooling in aggregate demand somewhat and bring (the policy rate) back closer to neutral.”

The Fed has kept its key interest rate in the range of 5.25 to 5.5 percent for over a year, which policymakers believe is having a slowing effect on economic activity.

In a keynote speech at the conference on Friday, Powell said bluntly that with inflation running just half a percentage point above the Fed's 2% target and unemployment rising, “the time has come to adjust policy.” That comment underscored expectations of a first rate cut at the Fed's Sept. 17-18 meeting. Depending on the outcome of the upcoming August jobs report, some economists expect the first cut to be even larger than usual, by half a percentage point.

The US should not rest on the fact that there is no more inflation, said Gourinchas. He pointed out that prices in the service sector are still rising and the Fed must adapt the pace and extent of interest rate cuts to the coming economic data.

“There is still some upside risk to inflation,” he said.

Nevertheless, it is also clear that the US labor market is cooling down, said Gourinchas, but from a position of strength and continued economic growth.

“I don't think we are in a situation where a recession in the US is imminent,” said Gourinchas. However, the likelihood of a soft landing has increased, “and that remains our baseline.”

(Reporting by Howard Schneider; Editing by Rod Nickel)