IMF Cuts US Growth Forecast, Market Reacts

The IMF released its latest forecast of US economic growth and US economic policy this afternoon, sending the S&P 500 and the Dow into negative territory.  While the market response is likely to be forgotten by next Monday, the IMF’s comments are worth consideration.  The forecast sees 1.9% real GDP growth in 2013,  2.7% in 2014 and 3.5% in 2015 — the 2013 number is a bit lower than others while the 2014 and 2015 figures look strong. Inflation is expected to remain low and unemployment will drift down a bit, averaging 7.5% this year and 7.2% next year.

The IMF applauds Fed policy, commenting “the Fed appropriately continued to add monetary policy accommodation over the past year…” but does not offer any comments on what the central bank might do next.  On fiscal policy (taxes and spending) the comments are more pointed and less complimentary: “On the fiscal front deficit reduction in 2013 has been excessively rapid and ill-designed.”  The IMF calls for repealing the sequester and replacing it with a more balance and back-loaded program of fiscal policy and for a early increased in the debt ceiling.

While the number one short term concern for the market is what the Fed does next, the IMF’s comments about the debt ceiling and fiscal policy point to the key issues for how the market behaves in the second half of 2013.

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