Christine Lagarde, managing director of the International Monetary Fund,… (PAUL J. RICHARDS, AFP/Getty…)
WASHINGTON — Amid speculation that the Federal Reserve soon might start scaling back its stimulus efforts, the International Monetary Fund cautioned that a pullback before next year could hurt economies worldwide.
Highlighting its concern Friday, the IMF lowered its forecast for U.S. economic growth next year to 2.7% from an earlier projection of 3%.
The IMF also criticized U.S. fiscal policy, calling for the repeal of the automatic federal spending cuts, known as the sequester, and urging lawmakers to act promptly to raise the nation's debt limit.
"We see that the recovery in the United States of America is gaining ground and becoming more durable," IMF Managing Director Christine Lagarde told reporters. "However, the economy has a ways to go before it returns to full strength."
Investors have been nervous that Fed policymakers, who meet next week, would start reducing the central bank's $85 billion in monthly bond buying as early as this summer. Those purchases have helped push down long-term interest rates, making stocks more attractive investments.
The Dow Jones industrial average of 30 blue-chip stocks fell 105.9 points Friday to 15,070.18 as some disappointing economic data added to worries of Fed action.
Lagarde said the Fed needed to manage its stimulus pullback carefully to avoid disrupting global financial markets. And, she said, the central bank has time to work on its exit strategy because the easy-money policies haven't fueled excessive inflation, as some analysts had feared.
"In our assessment, there is no need to rush to exit from monetary accommodations, given the still large output gap, given the subdued growth that we have and given the well-anchored inflation expectations," she said.
With the Eurozone stuck in its longest-ever recession and growth slowing in China, the U.S. economy is the "only boat afloat right now," said Diane Swonk, chief economist at Mesirow Financial.
But Fed Chairman Ben S. Bernanke and his colleagues have to focus on what's best for the U.S. economy, she said.
"The Fed is being burdened with more than it can possibly do," Swonk said. "It may be the lender of the last resort, but it's not the savior of last resort for the rest of the world."
In May, Bernanke told Congress that the Fed could start tapering its stimulative bond-buying in the next few months. But he warned against acting too quickly.
His comments led analysts to look to the Fed's September meeting as the time when policymakers might agree to begin reducing the purchases.
Gary Schlossberg, senior economist at Wells Capital Management, said Fed officials were watching economic growth and the labor market closely to determine when to start pulling back.
"I don't think they would argue with Lagarde's point about not doing it straight away," Schlossberg said. "To say they shouldn't do anything until next year is locking them in a bit too much."
But the IMF said continuing the full $85 billion in bond purchases through the end of the year was warranted because they have provided "important support to the U.S. and global economic recovery."
Monetary policy remains crucial because U.S. officials are reducing the budget deficit too quickly, the IMF said. U.S. deficit-reduction efforts this year — tax increases and the automatic spending cuts — have been "excessively rapid and ill-designed," the fund said.
The main reason for the projected downgrade in next year's U.S. economic growth prospects was the $85 billion in spending cuts this year — the first installment of nearly $1.2 trillion in reductions over the next decade.
"The sequester cuts not only reduce growth in the short term, but they also hurt the most vulnerable," Lagarde said.
IMF officials had assumed the cuts would not continue next year. But now that it appears they will, growth will be lower. The IMF forecasts the U.S. economy will grow 1.9% this year.
Last month, the Congressional Budget Office projected a $642-billion federal budget deficit this year, much lower than last year's more than $1-trillion deficit.
The removal of such a large amount of money from the economy will reduce this year's growth by as much as 1.75 percentage points, the IMF said.
At the same time, the IMF said Washington politicians were not doing enough to address long-term fiscal issues, such as reforming entitlement programs.
That led Lagarde to deliver the incongruous-sounding advice of "slow down, but hurry up."
U.S. officials should slow the pace of deficit reduction by replacing sequester cuts with "a more balanced and gradual pace of fiscal consolidation," she said.
At the same time, policymakers should move more quickly to adopt a plan to lower the growth in entitlement spending over the medium-term and increase revenue, possibly through an overhaul of the tax code, the IMF said.
"You might ask, 'What's the urgency? The problem is down the road,'" Lagarde said. "If those measures are taken early on, they won't be as painful."