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On Friday, the International Monetary Fund (IMF) slashed its forecast for economic growth in the United States, as demand appears to be cooling down in the face of an aggressive hike in the interest rates by the US Federal Reserve. However, the IMF did predict that the country would be able to avoid a recession narrowly.

IMF shares Predictions

The monetary organization conducted an annual assessment of the economic policies of the United States. It said that a 2.9% growth is expected in the Gross Domestic Product this year, which is less that the 3.7% forecast it had made back in April. The growth forecast for the next year was also slashed from 2.3% to 1.7%. The IMF also said that for 2024, it believes growth will fall to 0.8%.

In October 2021, the IMF had predicted that the US economy would grow by 5.2% in 2022, but recovery has been slow because of supply chain disruptions and new variants of COVID-19. Meanwhile, the war between Russia and Ukraine has also resulted in a sharp rise in the food and fuel prices, which has increased inflation to levels that had not been seen in almost 40 years.

KristalinaGeorgieva, the Managing Director at IMF, said that they were aware that the US had a very narrow path for avoiding an economic recession. She noted that there was a great deal of uncertainty regarding the outcome because, during the economic recovery process, there have been shocks from the COVID curbs in China and Russia’s invasion of Ukraine.

She added that the situation would become even more difficult with additional negative shocks. Nigel Chalk, the Deputy of Western Hemisphere for the IMF, said that if the shock turns out to be large enough, it could dip the US economy into recession. However, it is expected to be short-lived with only a small rise in unemployment, as opposed to the recession seen in 2001. He said that this was because demand would get support from strong US savings.

Inflation will be Painful

According to Georgieva, it is essential to control prices in order to sustain growth and protect incomes. She added that consumers are likely to face more pain before they go about to achieving this goal. She also disclosed that she had had discussions with Fed Chairman Jerome Powell and Janet Yellen, the Treasury Secretary, and they were committed to bringing down inflation in the country.

Currently, the inflation in the US is thrice more than the 2% tolerance of the Fed. Georgieva said that it was the central bank’s responsibility to control inflation. She added that the IMF believes that the aim of the Fed to hike interest rates up to 3.5% to 4% is the right tactic for bringing inflation under control. The current policy rate is between 1.50% and 1.75%.

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She said that they were supportive of the bank’s decision to cut down its balance sheet and that tightening financial conditions would also be helpful in bringing inflation down.

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