(April 2): While US inflation is on course to return to the US Federal Reserve’s (Fed) 2% target in the first half of 2027, policymakers have little room to cut interest rates this year, according to the International Monetary Fund (IMF).
IMF staff expect a single rate reduction by the end of 2026, according to the Washington-based lender’s annual review of US economy, known as an Article IV consultation. “On balance, staff see little scope to lower the policy rate over the coming year.”
“A larger monetary easing would need to be predicated on a material worsening in labour market prospects and an absence of increasing inflationary pressures, including from higher near-term inflation expectations due to rising oil and commodity prices,” the IMF staff said in the statement.
IMF executive directors, in a separate statement on the Article IV, said that with the Fed’s current policy stance being close to neutral, “there is little room to cut interest rates in 2026, particularly given the rise in energy prices, the likely pass-through to core inflation and the upside risks to global commodity prices that are likely to further delay the return to the inflation target”.
Under IMF staff’s baseline outlook, the Fed’s benchmark rate will reach a 3.25% to 3.5% target by year end. It’s currently at 3.5% to 3.75%. “This would allow the economy to return to full employment and 2% inflation” by the first half of 2027, the fund said.
See also: US trade deficit widened in February by less than forecast
US tariffs
Thursday’s release was a full version of the Article IV report, following a summary that was published in February. The IMF assessment on the US economy was conducted before the US-Israeli attack against Iran on Feb 28, so it doesn’t address broadly the conflict in the Middle East. The IMF did state that the war may “further incentivise US energy production”.
The fund continues to predict 2.4% gross domestic product growth for the country in 2026, supported by fiscal policy and a lower policy rate. Growth is seen slowing to 2.1% next year.
See also: US manufacturing expands most since 2022, input costs jump
On US President Donald Trump’s hiking of import duties, the IMF said “evidence suggests that the tariffs are, so far, largely being paid by US firms and, to a lesser extent, consumers”. The fund assumed an average applied effective tariff rate of around 7% to 8.5%.
“Given the costs and time needed to reshape supply chains in the face of these tariffs, the negative growth effects are likely to be largest in the near-term but are expected to be persistent,” IMF staff added.
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