UPDATE 1-IMF urges effective Fed communication on exit strategy
WASHINGTON, July 26 (Reuters) - The Federal Reserve will need to effectively communicate its strategy to exit from its massive monetary stimulus while avoiding excessive volatility in interest rates, the International Monetary Fund said on Friday.
In its annual assessment of the U.S. economy, the IMF said while the Fed had a range of tools to manage the normalization of monetary policy, there were risks and challenges in the unwinding of the stimulus the central bank has lent the economy.
"We have had a bout of volatility in recent weeks that shows that even with a clear strategy, you can have a period of volatility and financial institutions and regulators need to be ready for that," said Gian Maria Milesi-Ferretti, IMF Mission chief for the United States.
An announcement by Fed Chairman Ben Bernanke that the central bank expected to start scaling back on its monthly $85 billion bond purchasing program later this year and halt the program by mid-2014, triggered a global selloff in stock and bond markets in June.
Interest rates on everything from U.S. Treasury debt to home mortgage loans moved sharply higher, threatening to curtail credit for consumers and businesses.
The Fed has since made it clear its timeline for tapering bond purchases would depend on the economy's performance.
"We think that the strategy of the Federal Reserve to condition the pace of reduction in purchases of assets to the performance of the economy is wise and key to maintaining the needed momentum for the recovery," Milesi-Ferretti told reporters in a conference call.
Given a strengthening labor market recovery, many economists expected the Fed could make an announcement on the scaling back as early as at the September policy meeting.
Milesi-Ferretti said an analysis of the IMF's growth forecast for 2013, which is relatively weaker than the central forecast in the Fed's projections, showed tapering could start only early next year.
"We have them tapering off early next year, continuing through the year. But objectively we are talking about ... turns of data of small differences in how strong the recovery is going to be for the rest of the year," he said.
The IMF expects the U.S. economy to expand 1.7 percent this year, before accelerating to 2.7 percent in 2014. The economy grew 2.2 percent in 2012.
Much of the drag on gross domestic product (GDP) growth this year is blamed on belt-tightening in Washington, which the IMF described as "excessively rapid."