US Debt Reduction Plan 'Essential': IMF Chief Economist
Web Producer, CNBC.com
The US Congress should focus on a medium-term plan to cut government debt to dispel fears about the world's biggest economy, Olivier Blanchard, IMF chief economist, told CNBC Thursday.
On Wednesday, the Federal Reserve announced it would buy government bonds worth another $600 billion to help boost the US economy, sparking fears that the dollar will depreciate even further.
"I think it is very important that the US, over the next few months or a year, puts in place a very credible, medium-term plan so we can see what happens to the debt five years out, ten years out," Blanchard said. "That plan, I think, is essential. It's not quite in place yet."
"I think it would remove some of the concerns that people have about the US," he added.
The Fed was criticized that its move to print more money would push the rate of inflation up, but Blanchard said this is what the US needs now.
"A bit of inflation clearly would be very good, what we want to avoid is deflation," he said, explaining that the Fed move would "probably" help by boosting private demand in the US.
But representatives of emerging markets such as China and Brazil expressed concerns that the move would send even more speculative flows of capital into their economies, creating bubbles in asset prices.
Analysts told CNBC that inflation from the emerging markets may have a knock-on effect into developed nations, as companies will pass on the increase in costs to consumers.
"You have to differentiate between two percent inflation … and much higher rates of inflation in other countries," Blanchard said.
"Countries that are starting to overheat their inflation, yes, they should raise interest rates and slow it down," he added.
Raising interest rates would cause even more danger of speculative cash, or hot money, jumping in and out of emerging markets but said that there was a need for appreciation of some currencies, to reduce the imbalances between countries with high current account deficits and those with surpluses.
There is a need for an "orderly adjustment" of exchange rates, in which emerging markets currencies would appreciate but, if the appreciation is exaggerated, they put measures in place to control it such as capital controls to stop the flows of speculative money.