Home Correction journal IMF warns of possible market correction as interest rates rise

IMF warns of possible market correction as interest rates rise


As the US Federal Reserve prepares to tighten monetary policy, senior IMF official Gita Gopinath has warned that markets could undergo a correction – Copyright AFP/File FABRICE COFFRINI

Global stock markets that have tumbled in recent weeks but are showing signs of “overvaluation” risk a sharp correction as major central banks raise interest rates, a senior IMF official said on Tuesday.

“We certainly live in very turbulent times,” said Gita Gopinath, the newly installed number two at the International Monetary Fund, adding that “markets appear overvalued in many places and there is a high level of exuberance.”

Wall Street performed particularly stellar on Monday, with the broad-based S&P 500 falling 3.5% before beginning a late-day rally and ending with a modest gain.

The index jumped 27% in 2021, but investors grew wary of rising inflation, prompting the Federal Reserve to signal that a rate hike is imminent, likely in March.

The Fed’s exit from very stimulative monetary policy is “necessary given the strength of the recovery in the United States and the inflationary pressures we’re seeing,” Gopinath told reporters.

“One would expect that as interest rates rise we would see corrections in the markets. The hope is that it will remain orderly.

There remains a lot of uncertainty about how many times the Fed will raise rates to contain price increases, and that will weigh on markets, she said.

But as long as the Fed’s moves are “well telegraphed” and officials explain why, “it should definitely help to have a more orderly correction in the markets.”