IMF cuts U.S. growth forecast but predicts recession

On Friday, the International Monetary Fund slashed its U.S. economic growth forecast as aggressive Federal Reserve interest rate hikes cool demand, but predicted that the United States would narrowly avoid a recession.

The International Monetary Fund said it now expects the U.S. to be in the U.S. in an annual assessment of U.S. economic policies. Gross Domestic Product will grow by 2.9% in 2022, less than its forecast of 3.7% in April.

The IMF cut its U.S. growth forecast to 1.7% from 2.3% in 2023 and now expects growth to trough at 0.8% in 2024.

In October, the IMF predicted 5.2% U.S. growth this year, but since then new COVID 19 variants and stubborn supply chain disruptions have slowed recovery, while a surge in fuel and food prices in Ukraine have risen to 40 year highs due to Russia's war in Ukraine.

The outlook has a high degree of uncertainty, and we are conscious that there is a narrow path to avoiding a recession in the US. IMF Managing Director Kristalina Georgieva told a news conference.

The economy is recovering from the Pandemic and important shocks are buffeting the economy from the Russian invasion of Ukraine and from the lock-downs in China, she said. The situation would be more difficult because of further negative shocks. If large enough, a shock could cause the United States to go into a recession, but it would likely be short and shallow with a modest rise in unemployment, similar to the U.S. recession in 2001, said Nigel Chalk, IMF Deputy Western Hemisphere Director. He said that strong U.S. savings would help support demand.

Georgieva said price stability was important to protect U.S. incomes and sustain growth, but there may be some pain for consumers in achieving it.

She said that her discussions with Fed Chair Jerome Powell and U.S. Treasury Secretary Janet Yellen left no doubt as to their commitment to bring inflation back down. The Fed's preferred measure of inflation is more than three times higher than the U.S. central bank's 2% target.

The fund believes that the U.S central bank's desire to bring its benchmark overnight interest rate up to the 3.5% -- 4% level is the correct policy to bring down inflation, and that the responsibility to restore low and stable inflation rests with the Fed. The Fed's current policy rate ranges from 1.50% to 1.75%.

We believe that this policy path should create an upfront tightening of financial conditions which will quickly bring inflation back to target. She said that she supports the decision of the Fed to reduce its balance sheet.

Georgieva signaled that the IMF would support a scaled down version, despite Congress failing to pass Biden's climate and spending proposals.

She said that the administration should continue making the case for changes to tax, spending and immigration policy that would help create jobs, increase supply and support the poor.

The IMF sees clear benefits from rolling back the US import tariffs imposed over the last five years, which include punitive duties on Chinese imports and global tariffs on steel, aluminum, washing machines and solar panels.

The IMF statement shows that the U.S. economy is confronting global challenges due to the Biden administration's economic policies, according to Michael Kikukawa, U.S. Treasury spokesperson.

The Treasury said Yellen reiterated the importance of the IMF conducting frank and thorough assessments of the member economies of the IMF, in her meeting with Georgieva.