IMF backs Operation Twist amid warning on US fiscal policy

The International Monetary Fund has lended its support to the Federal Reserve’s Operation Twist, but cautions that US fiscal policy needs to be “carefully calibrated”.

In its Shifting Winds, New Policy Challenges report, which presents the regional outlook for the western hemisphere, the fund says US monetary policy looks likely to support growth over the coming years.

“The US Federal Reserve’s recent decision to maintain interest rates at historically low levels until at least mid-2013 and extend the maturity of its security holdings (Operation Twist) is appropriate,” the paper states.

The Fed unveiled Operation Twist last month. It will see the central bank release £258.2 billion of short-term dated US Treasuries then buy back long-dated Treasuries of the same value.

However, the IMF adds that the bank should consider “further unconventional measures” to support economic recovery, should the need arise.

Looking to the US’ fiscal policy, the Washington-based lender says “a credible medium-term plan that is sufficiently back-loaded, so as not to jeopardise a weak recovery, remains urgently needed”.

It claims that the American Jobs Act, which was proposed by president Barack Obama last month, could be effective in offsetting the fiscal tightening lined up for next year, while being budget-neutral.

But the IMF’s report notes the US still needs to develop an adjustment plan that will stabilise its debt over the medium term. It recommends this plan includes revenue-raising measures, such as fewer tax loopholes and more tax for higher-income households, and changes to entitlement programmes like lifting the retirement age.