The International Monetary Fund has warned that the market sell off could continue further amid the tightening of monetary policy from the U.S. central bank.
The Federal Reserve on Wednesday signalled the market that the central bank could start raising policy rates as soon as March as inflation is well above 2% target, saying that it will soon be appropriate to raise the target range for the federal funds rate.
The fed fund rate forecast went from three hikes to four hikes, and now some analysts even expect five rate hikes this year with one hike to be as much as 0.50 percentage point.
IMF’s financial counsellor and director of monetary and capital markets Tobias Adrian told CNBC that easy monetary policy is the main ingredient to fight the economic fallout from the pandemic, and now is the time to tighten policy as inflation is above the target and reach activity has come back to a larger degree.
“We could certainly see further tightening of financial conditions, and that means that risk assets such as equities could sell off further,” Adrian told CNBC.
The IMF also expected an unexpected 50 basis points from the Fed and said that it will be a substantial further sell-off in the equity markets.
Adrian noted that capital flows through many emerging markets have slowed down in the past three months, and IMF could see a further slowdown going forward.
