IMF warns of further U.S. interest rate rise

WASHINGTON (Reuter): The IMF has warned the United States that it will probably have to further raise short-term interest rates in the future to help hold inflation in check and keep economic growth on track, international monetary sources said.

"Further (rate) adjustments are likely to be needed to ensure a durable expansion," said one source, who asked not to be identified.

That advice, also contained in the International Monetary Fund's World Economic Outlook to be considered Wednesday, is unlikely to be welcomed with open arms by the Clinton administration, which is struggling to cope with a collapse in stock and bond prices brought on in part by higher short-term rates.

Although both markets staged a partial recovery Tuesday, stock and bond prices are still well below levels seen just two months ago, before the independent Federal Reserve nudged short-term rates higher for the first time in five years on February 4.

The semi-annual IMF economic outlook due to be considered by the Fund's board Wednesday will not be public until later this month. Although the IMF has no way of forcing the United States to follow its advice, its recommendations carry some weight because of the central role it plays in the international monetary system.

The outlook was compiled by IMF staff some three weeks ago and thus does not contain any discussion about either the most recent declines in the stock and bond markets or the Federal Reserve's second short-term interest rate increase on March 22.

Supportive

But monetary sources said the Fund seems very supportive of the actions by the Fed, essentially the U.S. central bank, in its attempt to ensure the durability of the upswing in the United States by tightening policy to head off future inflation.

With the U.S. expansion already three years old and factories running closer to full capacity, the Fed can't afford to take chances by holding back from tightening policy when needed, they said.

That's the mistake some industrial countries have made in the past -- holding rates down as their economies picked up in steam in hopes of stoking up growth, only to find they had fueled inflation instead.

The Fed also needs to be cautious because it takes so long for changes in interest rates to affect the real economy and inflation -- perhaps a year or more, the sources said.

Although the IMF does warn of the likelihood of further short- term rate increases in the United States, on the whole the Fund is generally upbeat about the outlook for the American economy, they said.

It has revised upwards its forecast for U.S. growth this year from the 2.6 percent rate contained in its last outlook in September.

Monetary sources said the Clinton administration program to slash the budget deficit has improved America's long-term economic outlook and has enhanced the durability of the expansion.

The IMF has also bumped up its 1994 growth forecast for the industrial world, from the 2.2 percent rate foreseen in September, and sees continued growth in 1995, as the Japanese and European economies recover, several sources said.

But the Fund believes that Japan may need to take further action to pep up its sluggish economy and that European nations may have to cut interest rates further to help that recovery along.