BERLIN: Inflation in the United States is “very stubborn” and the Federal Reserve should “stay the course” and tighten monetary policy or else lose credibility, said Gita Gopinath, the International Monetary Fund’s first deputy managing director.
The Fed has raised interest rates faster this year than any time since the early 1980s, when inflation was even higher and so entrenched in day-to-day American life that it took pushing short-term borrowing costs - and the unemployment rate - into double digits before price pressures finally receded.
“Inflation continues to be very stubborn,” Gopinath said of the United States in comments to German business daily Handelsblatt published on Monday. “If the Fed were to signal in such an environment that they are no longer tightening monetary policy as planned after all, that would involve a big loss of credibility,” she said in comments published in German.
“Therefore, they should stay the course in view of the economic data.”
Turning to Europe, she said: “Growth in the euro zone will weaken significantly, we expect only 0.5% next year.”
Nevertheless, she said it would be right for the European Central Bank to “normalise its monetary policy by the end of the year and then tighten next year”.
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Starting slowly initially then picking up pace in recent months, the ECB has been unwinding policy support all year and lifted rates by a combined 125 basis points at its past two meetings, the fastest pace of policy tightening on record.
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