The International Monetary Fund issued its second downward
revision for the U.S. economy in two months, cutting its growth expectations
for 2014 to 1.7% and warning that unrealistic market expectations could spell
losses for investors.
The cut, which puts the fund's forecast below the Federal
Reserve's recent downward revision and makes it the IMF's weakest annual
forecast since the end of the 2009 recession, reflects the sharpness of the
economy's first-quarter contraction and illustrates lingering unease over the
soundness of the U.S. recovery.
The fund's latest prognosis is lower than the most
pessimistic number issued by Fed officials in June, 1.9%, and far below the
central range predicted by bank policy makers. That means IMF forecasts for
unemployment and inflation are also much softer than the Fed's June
outlook. For example, while the Fed projects the economy could reach the
maximum sustainable employment rate as early as next year, the fund doesn't see
the U.S. reaching that goal until at least 2018.
The weaker outlook would suggest the need for a more gradual
path toward interest-rate increases than the Fed currently indicates. The IMF
also warned of a potential U.S. stock-market correction in the months ahead.
Mr. Chalk said investors may not be realistically pricing in risks that the
economy might recover at a slower pace than now forecast.
The IMF forecasts U.S. economic growth will accelerate in
the rest of this year and next to between 3% and 3.5%, after bad weather forced
the worst contraction since the financial crisis in the first quarter
of the year.
Even though the Fed forecasts are more optimistic than the
IMF's, some of the more cautious Fed officials have also signaled markets may
be too exuberant, pointing to low volatility levels and increased risk taking.
Strengthening confidence in the U.S. and global recoveries has spurred
investors to take riskier bets, pushing borrowing costs down and buoying stock
values.
But recent data give reason for prudence. While unemployment
has fallen fast, other labor-market indicators still show signs of weakness.
Last week, Fed Chairwoman Janet Yellen cited low levels of
labor-force participation and slow wage growth as signs of continued "significant
slack" in the job market.
Click here to access the full
article on The Wall Street Journal.