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IMF chief sees “narrowing path” to avoiding U.S. recession

The International Monetary Fund (IMF) chief said that there is “a narrowing path” to avoiding a U.S. recession, highlighting “significant downside risks” this year and especially next year.

“Based on the policy path outlined at the June FOMC (Federal Open Market Committee) meeting, and an expected reduction in the fiscal deficit, we expected the U.S. economy will slow,” IMF Managing Director Kristalina Georgieva said at a virtual press conference on the annual Article IV consultation to review the U.S. economy.

With inflation well above the Federal Reserve’s longer-run goal and an extremely tight labor market, the Fed raised the target range for the federal funds rate at each of the past three meetings. Last week, the Fed raised rates by 75 basis points, marking the sharpest rate hike since 1994.

Georgieva said the IMF believes the path for the policy rate that the Fed has signaled, to quickly get the federal funds rate to 3.5 to 4 percent, is the correct policy to bring down inflation, but there may be “some pain” for consumers.

The IMF chief also said that the IMF is mindful of the risks to the U.S. economy. “We are actually seeing very significant downside risks this year and especially next year,” she said.

The IMF chief’s remarks came as a growing number of economists and analysts have voiced concerns that with elevated inflation, the Fed’s more hawkish stance could plunge the U.S. economy into a recession.

Economists recently surveyed by The Wall Street Journal have dramatically raised the probability of recession, now putting it at 44 percent in the next 12 months, up from 28 percent in April. The latest figure shows a level “usually seen only on the brink of or during actual recessions.”

Fed Chair Jerome Powell said earlier this week that the Fed’s aggressive rate hikes could tip the U.S. economy into recession. “It’s not our intended outcome at all, but it’s certainly a possibility,” Powell told lawmakers at a Congressional hearing.

Former President of the Federal Reserve Bank of New York Bill Dudley, meanwhile, said in a recent Bloomberg opinion piece that a recession is “inevitable” within the next 12 to 18 months.

At the IMF virtual press conference, Nigel Chalk, deputy director in the IMF’s Western Hemisphere department, said if there ultimately is a recession, it would likely be “relatively short,” with unemployment rising “relatively modestly.”

“We are particularly watchful on the implications of tightening of financial conditions in the U.S. as well as exchange rate appreciation that is affecting emerging marketing and developing economies, especially those that have a high level of dollar-denominated debt,” Georgieva said.

The IMF chief noted that there are “clear benefits” in rolling back the tariffs that were introduced over the last five years, especially at a time when inflation is high and supply chains are strained.

“We do support the considerations the (Biden) administration is giving to eliminating tariffs that have been put in place over the last five years, because it would help in the fight against inflation,” Georgieva said, while noting that the impact is not significant.

Meanwhile, the IMF strongly supports domestic policies in the United States and elsewhere that are attentive to the unintended consequences of an integrated global economy and open trade.

“Compensatory policies must be in place for those that suffer negative consequences,” she said.
Source: Xinhua

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