IMF warns of possible market correction as interest rates rise

WASHINGTON, Jan 25, 2022 (AFP) – Global equity markets that have seen-sawed in recent weeks but show signs of “overvaluation” are at risk of a sharp correction as major central banks raise interest rates, a top IMF official said Tuesday.

“We are certainly living in very turbulent times,” said Gita Gopinath, the newly-installed number two at the International Monetary Fund, adding that “markets look overvalued in several spots and there is a high level of exuberance.”

Wall Street put in an especially dramatic performance on Monday, with the broad-based S&P 500 sinking 3.5 percent before staging a recovery late in the day and ending with a modest gain.

The index jumped 27 percent in 2021, but investors have become wary amid rising inflation which has prompted the Federal Reserve to signal that a rate hike is coming soon, likely in March.

The Fed’s exit from highly stimulative monetary policy is “needed given the strength of the recovery in the US and the inflation pressures that we are seeing,” Gopinath told reporters.

“One would expect that as interest rates go up, we will see corrections in markets. The hope is that this will stay orderly.”

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

But as long as the Fed’s moves are “well-telegraphed” and officials explain the rationale, “That should certainly help with having a more orderly correction in markets.”