The Federal Reserve may need to continue raising interest rates depending upon how economic conditions evolve in the United States, International Monetary Fund chief Rodrigo Rato said on Monday.
Generally he said the withdrawal of stimulative monetary conditions globally is a "healthy movement" especially given that inflationary risks are to the upside. But central banks need to time moves based upon conditions in their own regions.
"I back the idea that the U.S. monetary authorities have done a very important job in getting to a more neutral monetary policy regarding their own economy.
"Still some measures might be needed in the future, but that will depend very much on the data on the strength of the U.S. economy," Rato, the IMF managing director, said at a news conference.
Rato urged caution on the parts of the Bank of Japan and the European Central Bank, where recoveries are less well entrenched.
"In the case of Europe, there is a need for higher growth.... We see the need for monetary policy to be very aware in Europe (that it is still in) the first stages of the recovery," he said.
Markets have speculated that the ECB may raise rates by as much as half a percentage point at its June 8 meeting. But the IMF regularly has urged the ECB to go slowly with rate tightening, given that domestic spending remains very weak.
As for Japan, Rato called the ending of its policy of flooding the markets with cash to beat deflation "positive" but said the BOJ should be "very cautious in terms of future movements."
The end of monetary stimulation by all three of the world's major central banks — the Fed, the ECB and the BOJ — and fears that mounting inflationary pressures worldwide may require more aggressive rate tightening has unsettled global financial markets in recent weeks.
Key stocks indices in the United States, Europe and Japan have fallen from their late April to early May peaks, shedding at least five percent in value. Buoyant commodities also have gone into retreat, and the U.S. dollar dropped.
Rato said these market adjustments, which were continuing on Monday, demonstrate that investors are aware of global risks from inflation and from global imbalances, the catch-all phrase that refers to the huge U.S. current account deficit and China's virtually fixed exchange rate.
Some people have suggested global imbalances are not a serious threat. "Last week shows that is not the case," said Rato.
"The markets are very aware of global risks. One of them is inflation, another is how to resolve global imbalances in a measured manner," he said.
The IMF managing director also expressed some calm over currency movements though he cautioned against abrupt adjustments. The U.S. dollar has shed some 7 percent of its value against the euro since the start of the euro, with declines accelerating in recent weeks.
"The evolution of foreign exchange rates in recent months is in line with basic fundamentals," he said.
"It would be healthy for the world economy if the evolution in foreign exchange rates are measured in time and done (in line with) economic fundamentals," he said.
On a trade weighted basis, the U.S. dollar has declined less sharply, by about 3 percent since early April.
