IMF chief Gourinchas supports interest rate cuts in the US, but warns of ongoing inflation risks

The Fed's upcoming interest rate cuts are “in line” with the recommendation of the International Monetary Fund, which has placed great emphasis on controlling inflation but is now observing a shift in risks towards 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 – a level that it believes places too many restrictions on economic activity.

In his prepared remarks for Friday's meeting, Powell said only that with inflation running just half a percentage point above the Fed's 2 percent target and unemployment rising, “the time has come to adjust policy.” Those remarks set expectations for the first rate cut at the Fed's Sept. 17-18 meeting. In fact, some economists expect the first cut to be half a percentage point larger than usual, depending on the upcoming August employment report.

In an interview, Gourinchas said the US should not rest on the fact that there is no more inflation. He pointed out that prices in the service sector are still rising and that the Fed must adjust the pace and extent of interest rate cuts to the upcoming 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 starting point.”