WASHINGTON -- The managing director of the International Monetary Fund urged the Federal Reserve yesterday to move quickly to raise short-term interest rates once the U.S. recovery picks up speed.
The unusually direct plea from
the organization's head, Michel V
Camdessus, came as IMF officials said they hope the worst of the European currency crisis is over and that they see signs of calm following Sunday's vote in France in favor of the Maastricht treaty calling for European unification.
"We would recommended to the Federal Reserve to be prompt [in] accompanying the recovery with moderate and progressive increases in interest rates as soon as the recovery gains momentum," Mr. Camdessus said after a meeting of the IMF Interim Committee, the fund's policymaking unit.
"Part of the problems we are going through right now comes from the fact that interest rates in Germany are too high and interest rates in the U.S. are too low," said Spanish Finance Minister Carlos Solchaga, chairman of the committee.
European countries, he said, cannot accept a U.S. policy of "benign neglect" that focuses on lower interest rates for domestic reasons without taking into account the dollar's role as an international currency.
Mr. Solchaga said European countries are hopeful that Germany will lower its interest rates further to help take pressure off weaker currencies in the Exchange Rate Mechanism, but he said he agreed with Mr. Camdessus that higher U.S. rates would help. "If interest rates in the mark come down, it would be very useful for dollar interest rates to respond," he said.
The comments by the two senior IMF officials were in contrast to the appearance of unity that the Group of Seven finance ministers sought to convey when they wrapped up their Saturday meeting. Treasury Secretary Nicholas Brady said the meeting was a restrained one, without much finger pointing over interest rates.
Moreover, U.S. officials repeatedly took the position that the real problem with exchange markets in Europe was high German interest rates that enforced weaker countries to keep their rates up to protect their currencies. The U.S. position has been to favor lower global interest rates to help revive the sluggish economies of many industrial countries.
Analysts dismissed the IMF call for higher U.S. rates. John Costas, managing director of government trading for First Boston Corp., called the idea "premature" and said he expects Germany to cut rates further. "Just like the Fed, once they change direction, they won't go just once," he said. "The first is the hardest."
"Rather than lower German interest rates to stabilize the foreign exchange markets and take pressure off a variety of currencies, they're proposing raising rates to crush the few components of the economy showing any life," said Charles Lieberman, managing director of Chemical Securities. "It makes no sense whatsoever."
Mr. Lieberman added, "It's grossly premature to anticipate rising inflation in the U.S. when we barely have a recovery under way."
The real issue, Mr. Lieberman said, is the failure of the European monetary system to permit exchange rate adjustments in the wake of the massive German spending for unification and the tight monetary policy of the Bundesbank.
Still, he said, U.S. fixed-income markets have been relatively unscathed by events in Europe. "We're bystanders here."
Last week the dollar strengthened in exchange markets after Britain and Italy devalued their currencies, easing fears that the Fed's ability to steer monetary policy was being impaired. "Now what's affecting us more is the economy and the uncertainty surrounding the elections," said Mr. Costas.
"There is a degree of calm," said Mr. Solchaga of the IMF. "Tensions are much lower than they were last week." At the same time, he conceded, it is not known when and under what terms Britain and Italy will return to the European rate mechanism.
IMF officials said the Interim Committee will consider a request by Belgium to hold a special session in the first three months of next year to review the large changes sweeping through global financial markets. Mr. Camdessus said the meeting would review ratification of the Maastricht treaty in Europe, the Japanese fiscal stimulus package, and possible changes in the U.S. administration.