No tax cuts and no rate cuts in September, IMF’s recipe to avoid a US (and global) crisis

The IMF Warns the US: More Taxes and Caution on Fed Rate Cuts in September

The International Monetary Fund has advised the United States on the importance of implementing more taxes and being cautious with Federal Reserve rate cuts until at least the end of 2024.
The IMF emphasizes the need for the government to increase taxes to curb the growing federal debt, even for families earning less than the $400,000 threshold set by President Joe Biden.

The IMF’s recipe for the US public finances seems clear: a greater fiscal prudence is required, as US deficits continue to rise despite robust economic growth, while both Republicans and Democrats are formulating tax and spending proposals in view of the November presidential elections.

Moreover, the specter of inflation persists, and a change in Fed monetary policy before the end of the year could backfire.
The IMF offers advice to the US to avoid an economic crisis, which could have global repercussions.

Why Does the IMF Advocate for Increased Taxes in the US?

According to the IMF, the US public debt-to-GDP ratio should remain well above pre-pandemic forecasts in the medium term, reaching 109.5% by 2029, compared to 98.7% in 2020.
The IMF states that “such high deficits and debts create a growing risk for the US and global economy,” emphasizing the need for progressive tax increases, even for those earning less than $400,000 annually, and cuts to several tax expenditures.

President Biden has proposed raising tax rates for corporations and wealthy Americans, pledging not to increase taxes on families with annual earnings below $400,000.
Republican rival Donald Trump has expressed his desire to preserve the tax cuts approved during his presidency in 2017 and possibly further reduce some taxes for middle-income Americans and businesses.

The IMF, known for advocating fiscal prudence among its debtor countries, has recommended a series of options to reduce deficits, including the reduction of certain tax deductions and long-standing exemptions that it considers ineffective.
For example, it has recommended increasing federal excise taxes on gasoline and diesel, which have not been raised since 1993.
This measure is unlikely to be announced during an election campaign and with inflation still unstable.

Fed, No Rate Cut in September According to the IMF

Pierre-Olivier Gourinchas, Chief Economist at the IMF, told Reuters that the Fed can afford to wait longer to begin easing monetary policy, thanks to the strong labor market.
While markets are confident in a rate cut in September, expected globally, the accommodative shift should not take place before the end of 2024 according to the IMF, to avoid further upside surprises in inflation data.

The next policy-setting meeting of the Fed is on July 30-31, with other meetings scheduled for September 17-18, November 6-7 (after the US elections), and December 17-18.
It is unclear which meeting the IMF considers most suitable for a rate cut, but the warning for caution translates into ongoing concerns regarding prices.
The IMF stated, “Given the clear upside risks to inflation highlighted starkly in data released earlier this year, it would be prudent to lower the policy rate only after data provides clearer evidence that inflation is sustainably returning to the FOMC’s 2% goal.”