With Europe overcoming its debt crisis and a recovery of the U.S. housing market, global policy makers’ concerns are shifting to the uncharted territory of exiting extraordinary monetary stimulus. Bond prices slumped internationally and emerging-market stocks plunged after May 22, when Federal Reserve Chairman Ben S. Bernanke said for the first time the Fed may trim its asset-purchase program within the next few meetings.
While those markets rebounded last month after the central bank refrained from paring its bond buying plans, the IMF said developing economies’ sovereign yields are now 0.8 percentage point higher than at the beginning of the year.
“This change could pose risks for emerging-market economies, where activity is slowing and asset quality weakening,” the IMF wrote in the report. “Careful policy implementation and clear communication on the part of the Federal Reserve will be essential.”
The fund said its forecasts assume the Fed won’t raise its benchmark interest rate, which has been near zero since December 2008, before 2016 and that the U.S. central bank will start tapering its bond-buying program later this year.
The IMF urged the world’s major economies to adopt policies that will boost their prospects or face prolonged subdued expansion, especially at a time of weaker growth in China, which will hurt commodities exporters and other developing economies.
The U.S. needs better fiscal plans for the medium term, and the economic drag from across-the-board, automatic budget cuts this year may be bigger than the fund expected, according to the report. The IMF cut its growth forecast for the world’s largest economy to 1.6% this year and 2.6% next year, each 0.1 percentage point less than forecast in July.
Japan, where the IMF maintained forecasts of 2% growth this year and 1.2% next year, also needs a strong budget plan for coming years, according to the fund. While the current fiscal and monetary stimulus is proving effective, the central bank should be prepared for another round of monetary stimulus if it doesn’t manage to boost inflation expectations to its target of 2%, according to the fund.