The International Monetary Fund has cut its forecast for U.S. growth for the second time in two months, citing the increasingly difficulty of sidestepping inflation, compounded by the lingering COVID pandemic and Russia’s invasion of Ukraine.
In its so-called Article IV consultation released on Tuesday, the executive board of the IMF cut its U.S. 2022 growth forecast to 2.3%, after cutting growth to 2.9% in June.
The executive directors noted how the rapid rebound in U.S. growth from the COVID-19 shock, thanks to “unprecedented monetary and fiscal support,” has also been accompanied by a surge in inflation. In concurrence with many warnings out there, the IMF said inflation will pose “systemic risks” to both the U.S. and the global economy.
It urged monetary policy officials to get the balance right — slowing price growth without sparking a recession. The IMF also welcomed June’s interest rate increase from the Federal Reserve and a decision to provide forward guidance on the federal-funds rate path, “which should create the necessary upfront
tightening of financial conditions to quickly bring inflation back to target.”
But the directors also warned that inflation responses these days are “high-stakes”, and getting the mix wrong either way would result in “stable costs at home and negative spillovers to the global economy.”
Avoiding recession in the U.S. “is becoming increasingly challenging”, with Russia’s war in Ukraine, COVID and supply-side constraints creating “additional challenges,” the report said.
The directors also advised that the U.S. roll back trade restrictions and tariff rises that were introduced in the past five years, as well as facilitating a smooth transition to a low-carbon economy and achieve climate goals.
