Washington - The International Monetary Fund Wednesday suggested the United States should sharply raise interest rates to ward off inflation threats as the economy improves and turmoil in financial markets begins to ease. As the Federal Reserve prepares for its next rate-setting meeting on Tuesday, the IMF warned that greater inflation expectations have left monetary policymakers with a difficult balancing act.
Interest rates should remain on hold for the time being as growth remains sluggish, but the Federal Reserve must keep a watchful eye on rising commodity prices, the IMF said.
"Given the high cost of reversing such (inflation) expectations once they become entrenched, most directors underscored that the bias should be toward a decisive tightening once recovery is established and financial conditions ease," the IMF said in an annual evaluation by its executive board of directors.
The US central bank has slashed its benchmark federal funds rate by 3.25 percentage points since September, but the Fed left rates unchanged at its last meeting in June.
The IMF board recognized that "downside risks to growth still remain large" and praised the US for implementing a series of emergency lending programmes to help keep financial institutions afloat.
The IMF welcomed an emergency plan by the US Treasury to shore up the finances of mortgage giants Fannie Mae and Freddie Mac, which together manage nearly half of the 12-trillion-dollar mortgage market in the United States.
