As the Federal Reserve commits to an aggressive policy of monetary tightening, the International Monetary Fund has downgraded its US growth forecast, though it believes the US will “narrowly” avoid a recession.
The IMF now predicts that US Gross Domestic Product will grow 2.9% in 2022, down from its last forecast of 3.7% in April. The IMF prediction continues to cut its predictions of growth in 2023, which it says will be 1.7%, down from 2.3%, and growth will be 0.8% in 2024.
The IMF prediction for growth this year back in last October was 5.2%, but since then supply chain disruptions, combined with surging energy prices drove up prices to a point the Federal Reserve declared it had no choice but to tighten policy to bring inflation to heel, and it would be committed to that despite the consequences on the broader economy.
IMF Managing Director Kristalina Georgieva told a news conference, “We are conscious that there is a narrowing path to avoiding a recession in the U.S.,” however she did acknowledge there was a high degree of uncertainty about exactly what would happen.
She went on, “The economy continues to recover from the pandemic and important shocks are buffeting the economy from the Russian invasion of Ukraine and from lockdowns in China. Further negative shocks would inevitably make the situation more difficult.”
IMF Deputy Western Hemisphere Director Nigel Chalk said that the US could land in a recession if a large enough shock were applied to the system, but it would likely be short and shallow, with only a modest rise in unemployment, similar to the recession in 2001.
Georgieva said it was important to the economy to achieve price stability, however there would be “some pain” required to achieve it. She did say that after talking with Fed Chair Jerome Powell, and US Treasury Secretary Janet Yellen, they, “left no doubt as to their commitment to bring inflation back down.”
At present the Fed judges US inflation as running at over three times its preferred 2% target rate.
Georgieva said the IMF believes the Fed’s current strategy to bring the benchmark overnight interest rate up to 3.5%-4% is “the correct policy to bring down inflation.” Currently the policy rate sits at 1.50% to 1.75%.
She said, “We believe this policy path should create an upfront tightening of financial conditions which will quickly bring inflation back to target. We also support the Fed’s decision to reduce its balance sheet.”
U.S. Treasury spokesperson Michael Kikukawa said the IMF analysis showed the US economy was operating “from a position of strength.”
