MercoPress. South Atlantic News Agency

IMF calls for ‘timely’ unwinding of US stimuli program fearing markets’ volatility

Ben Bernanke will be chairing a crucial meeting of the FOMC this week

The International Monetary Fund cautioned on the possible risks of the United States ‘non timely’ unwinding of the stimuli program implemented by the Federal Reserve and the collateral effects that such a policy could have on emerging economies, as those in Latinamerica.

The warning was included in the final statement of the IMF 2013 Article IV Mission to the United States, or review of the country’s economic situation, and repeatedly brought up during the press conference that followed the presentation of the report, with Managing Director Christine Lagarde attending.

This coming week also the Federal Open market Committee will be meeting June 18/19 when a Summary of Economic Projections will be addressed. This will be followed by a press conference by the Chairman.

According to the IMF assessment, the dismounting of the stimuli program has the potential of triggering a quick return to the US of capital inflows to emerging economies, besides causing an increase in interest rates world wide.

The Fed currently purchases 85 billion dollars every month in government and private papers such as mortgages with the purpose of boosting liquidity in the US economy and to keep the interest rate level sufficiently low to help consumption and jobs.

Since the Fed Chairman Ben Bernanke last month said that the stimuli program could begin to be slowed down by the end of the year, markets have reacted ahead of such decision by upping interest rates and the dollar has strengthened vis-à-vis the rest of the world’s currencies.

The consequences of this reaction is being felt particularly in emerging markets, as the currencies of several countries including that of Brazil has been losing ground (strong devaluation) against the US dollar in recent weeks, which at the same time has been met with tougher measures from their governments.

This last week the Brazilian government eliminated the 1% tax on financial operations, IOF, applied to the future’s market, as part of a policy to lift the restrains on the inflow of capital that have been in effect for several years to try and avoid the revaluation of the Brazilian currency.

Countries such as Poland and India were also forced to intervene in the foreign exchange market to prevent their currencies from further sliding and in a surprise measure Indonesia increased interest rates in an effort to attract foreign capital inflows.

“While the U.S. Federal Reserve has a range of tools to help manage the exit effective communication on the exit strategy and careful timing will be critical to avoid excessive volatility in long-term interest rates as the exit nears”, pointed out the IMF in its Article IV report.

“Uunwinding monetary policy accommodation is likely to present challenges, including for financial stability. So this needs to be managed carefully. In our assessment, there's no need to rush to exit from monetary accommodations, given the still large output gap, given the subdued growth that we have, and given the well-anchored inflation expectations”, said Ms Lagarde at the press conference.