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IMF: Countries should prepare for exit from monetary policies

Staff writer |
Countries around the world should take steps to prepare for a potentially bumpy exit from the unconventional monetary policies the U.S. and other major economies adopted in the wake of the 2008 financial crisis, the International Monetary Fund said.

Exit from extraordinary stimulus programs such as the Federal Reserve's ongoing bond-buying program is not yet warranted, the IMF report said. Still, other countries not pursuing unconventional policies "should take measures to safeguard their stability in preparation for exit and lay the foundation for sustained medium-run growth".

The paper, "Global Impact and Challenges of Unconventional Monetary Policies, was released ahead of the IMF's annual meeting, which begins this week in Washington, D.C.

While the IMF believes central banks have the tools and policies necessary to manage exit smoothly, there is still a chance that there could be some turbulence with international impact, Karl Habermeier, assistant director of the IMF's monetary and capital markets department, told reporters during a conference call Monday.

Emerging markets started reeling in May when the Fed began talking about winding down its easy money policies, designed to hold U.S. interest rates very low to spur a stronger U.S. economic recovery.

Investors had plowed money into emerging markets in recent years while the U.S. recovery was sluggish and U.S. interest rates were at historic lows. That tide started to reverse in May, triggered by the prospect of rising U.S. rates and a strengthening economy, causing currencies and stocks to fall sharply in many developing economies.

The paper contends that unconventional monetary policies in the U.S., Europe and Japan have helped those countries and the global economy more broadly, especially those employed early during the crisis to stabilize the financial system.

Policies such as the Fed's bond-buying program used to stimulate demand after short-term interest rates became pinned near zero were also effective in lowing long-term interest rates, preventing deflation and supporting economic activity and as of May had not unleashed any serious adverse consequences on other countries, the paper found.

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