AlHijjah 4, 1434, Oct 9, 2013, SPA -- Any move by the U.S. Federal Reserve (Fed) to reduce its massive economic stimulus program would pose a significant challenge to global financial stability, the International Monetary Fund (IMF) said Wednesday. The Fed is expected to start reducing its monthly bond purchases early next year. Reducing the stimulus would signal the central bank's confidence in the strength of the U.S. economy. In its Global Financial Stability Report released ahead of the annual IMF and World Bank meetings this week in Washington, the IMF said such a sign of U.S. strength should help overall financial stability, but managing a smooth transition away from the extraordinary bond purchases "could prove challenging," as both interest rates and market volatility rise. "This process will be unprecedented and complex," said Jose Vinals, an IMF financial counselor. "Containing longer-term interest rates and market volatility has already proven to be a substantial challenge, as shown by the sharp rise in bond yields and volatility since May." The report said one potential risk to greater global financial stability is the chance that U.S. long-term interest rates could rise more sharply than expected. The report recommended that the Fed clearly communicate its intentions on any reduction of stimulus. The report also urged Europe to advance plans to form a banking union-a single body that would restructure or dismantle failed banks across the region. Vinals noted that developing countries saw a bigger-than-normal surge in bond investments over the past five years, and they are already seeing significant capital flows out as interest rates rise in the United States and attract investment. Highlighting one risk to global financial stability, such outflows could increase significantly along with volatility, he warned.
