US Federal Reserve Should Let Inflation Overshoot Targets, IMF Recommends

The Federal Reserve plans to raise rates in the coming months

by Peter Spence, Economics Correspondent

US policymakers should allow inflation to rise above official targets, the International Monetary Fund has recommended, as it warned that the risks of deflation still loom over the world’s largest economy.

The fund has said that the Federal Reserve should “accept some modest, temporary overshooting” of its inflation goal, allowing price growth to exceed 2pc for a period.

IMF staff said that this would “provide valuable insurance against the risk of disinflation”, allowing price growth to wane, and fall back towards negative territory. The fund said that “the likelihood and severity” of this risk could force the Fed to retrace its steps in turn, and cut its interest rates back to zero.

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