IMF lowers growth prospects as FOMC discusses actions

The IMF released the World Economic Outlook report in which it lowered growth prospects for advanced economies, particularly the US. Global growth forecast was also revised, to a moderate 4% in 2011 and 2012. At the same time, the FOMC is debating actions the Federal Reserve could implement to boost US economy.

The IMF warned against hasty budget cuts in the US and mentioned that the Fed should be ready to act. The institution now forecast that growth in the US will be of 1.5% in 2011 and 1.8% in 2012 (down from previously estimated 2.5% and 2.7% respectively). Growth forecast of most of the advanced countries were revised lower, but the US forecast suffered the biggest change. “Real GDP growth in the major advanced economies –– the United States, euro area, and Japan–– is forecast to rise modestly, from about ¾ percent in the first half of 2011 to about 1½ percent in 2012, as the effects of temporary disturbances abate and the fundamental drivers of expansion slowly reassert themselves,” the report stated and added that relative to the previous report, release in June, “the most noteworthy revision is the reduction in the real GDP growth forecast for the United States, by 1 percentage point over 2011 and 2012.”

It was mentioned that the fiscal priority in the US and also in Japan, should be the implementation of a credible and well-paced medium-term consolidation program that focus on long-term debt sustainability. “For the United States, the main priority is to soon launch a medium-term deficit reduction plan so as to stabilize the debt ratio by mid-decade and gradually reduces it thereafter under realistic macroeconomic assumptions.”

It supported Barack Obama’s plan to create jobs, saying that it would support the economy in the short-term but warned that it must be flanked with a strong medium-term fiscal consolidation, that limits spending and seeks higher revenues.

FOMC debates

The Federal Reserve started on Tuesday its 2-day meeting to discuss monetary policy. Some members of the FOMC are looking for further monetary stimulus. While some argue in favor of more purchases, others look for different, more moderate measures, like “operation twist” and / or, lowering the rate the Fed pays to banks for excess reserves. The outcome of the meeting is not clear because there are also some members that oppose further stimulus.

At the Danske Bank, they expect the Fed to take action by changing it portfolio toward longer maturity government bonds (Operation Twist) as the deterioration in the economic outlook continued in the last months. “This strategy could buy the Fed some time, to see if economic data improves over the coming months; ff not, we expect to see some version of QE3 within the next six months,” added analysts from the Danske Bank.

On Wednesday, markets will hear from the Fed, ending weeks of speculation