The International Monetary Fund (IMF) stated on Thursday that the Federal Reserve should hold off on cutting interest rates until late 2024. The IMF also urged the U.S. government to raise taxes.
The IMF explained that increasing taxes is necessary to curb the growing public debt, including on families earning less than $400,000 annually, the limit set by President Joe Biden.
These recommendations were included in the IMF’s annual review report, prepared by its staff to assess the economic policies of each member country under “Article IV.”
In recent weeks, the IMF has emphasized the need for fiscal restraint as the U.S. budget deficit continues to rise, despite strong economic growth. This comes as the Republican and Democratic parties formulate their tax and spending proposals ahead of the November U.S. presidential election.
Pierre-Olivier Gourinchas, the IMF’s chief economist, told Reuters on Tuesday that the strong labor market may lead the U.S. central bank to delay easing monetary policy.
Postpone Interest Rate Cut
According to an IMF staff report, the Fed should delay its interest rate cut until “late 2024” to avoid surprises in inflation data. The report did not specify a particular month.
The next Fed policy meeting is scheduled for July 30-31, followed by meetings on September 17-18, November 6-7 (following the U.S. elections), and December 17-18.
Given the significant risks of higher inflation based on early-year economic data, it would be prudent to cut U.S. interest rates only when there is clear evidence that inflation remains at the 2 percent target set by the Federal Open Market Committee.
Raise Taxes
The IMF noted that the U.S. public debt-to-GDP ratio is projected to remain above pre-pandemic levels in the medium term, reaching 109.5 percent by 2029, compared to 98.7 percent in 2020.
“These high levels of deficits and debt create increasing risks to the American and global economy,” the IMF stated. It recommended progressive tax increases based on income, including for those earning less than $400,000 per year, and eliminating various tax breaks.
President Biden has proposed raising taxes on corporations and wealthy Americans while pledging not to raise taxes on households earning less than $400,000 annually. In contrast, his Republican opponent Donald Trump has expressed his desire to maintain the tax cuts enacted in 2017 during his presidency and may consider deeper tax cuts for middle-class Americans and corporations.
The individual income tax cuts are scheduled to expire at the end of 2025, reverting to pre-2017 levels unless Congress takes action to extend or modify them. The Congressional Budget Office (CBO) estimates that extending these cuts would add $4.6 trillion to the deficit over a decade.
The IMF recommended several options to reduce the deficit, including eliminating some long-standing tax deductions and exemptions, such as employer-provided health care plans, capital gains from selling a primary residence, and deductions for mortgage interest and state and local taxes.
IMF Urges US to Delay Interest Rate Cuts and Raise Taxes
The International Monetary Fund (IMF) has advised the Federal Reserve (Fed) to postpone interest rate cuts until late 2024 and has urged the U.S. government to raise taxes. This recommendation comes as the IMF sees the growing public debt as a significant risk to the American and global economies.
Postpone Interest Rate Cut
The IMF’s annual review report, which assesses the economic policies of its member countries, has recommended the Fed wait until late 2024 before starting to ease monetary policy. This recommendation is based on the ongoing risks of higher inflation, evidenced by recent economic data. The report underscores the importance of maintaining interest rates until there is clear evidence that inflation has stabilized at the 2% target set by the Federal Open Market Committee.
The Fed’s next policy meeting is scheduled for July 30-31, followed by further meetings on September 17-18, November 6-7 following the US elections, and December 17-18. The IMF’s recommendation implies that a rate cut is unlikely before the final meeting of the year, highlighting the cautious approach the organization believes is necessary.
Raise Taxes
The IMF also emphasizes the need for tax increases to curb the rising public debt, projecting the U.S. public debt-to-GDP ratio to reach 109.5% by 2029, a significant increase from 98.7% in 2020. The IMF recommends progressive tax increases across income brackets, including those earning less than $400,000 a year, and advocates for eliminating a range of tax breaks.
This recommendation aligns with President Joe Biden’s proposal to raise taxes on corporations and wealthy Americans while maintaining the current tax structure for households earning less than $400,000 a year. However, it diverges from the stance of his Republican rival, Donald Trump, who aims to maintain the 2017 tax cuts and potentially introduce further cuts for middle-class Americans and corporations.
The IMF has highlighted several specific areas where tax deductions and exemptions might be reduced to decrease the deficit. These include:
| Tax Deduction / Exemption | Explanation |
| Health care plans provided by employers | Reducing the tax advantages associated with employer-sponsored health insurance might help curb costs. |
| Capital gains from the sale of the primary residence | Limiting or eliminating tax breaks on capital gains from the sale of homes might increase revenue. |
| Deductions for mortgage interest and state and local taxes | Adjusting these deductions might generate additional revenue, especially for higher-income earners |
The IMF’s recommendations underscore the growing concern regarding the U.S.’s fiscal trajectory. As the country prepares for its upcoming presidential election, the issue of fiscal responsibility is likely to be a major topic of debate. The IMF’s call for fiscal prudence might influence both parties’ approaches to tax policy and government spending.
The IMF’s stance on interest rate cuts and tax increases serves as a reminder of the economic challenges facing the U.S. and emphasizes the importance of responsible fiscal policy in navigating these challenges.
The IMF’s recommendations are crucial for ensuring the stability of the U.S. economy and addressing the growing public debt. Whether the recommendations will be implemented remains to be seen, but they serve as a critical reminder of the importance of fiscal prudence.
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