US recession would be “necessary price” to defeat inflation: IMF chief

With inflation soaring and the Federal Reserve raising interest rates, the United States faces an increased risk of a downturn, IMF Managing Director Kristalina Georgieva said on Friday.

But any temporary pain caused by a recession would be “a necessary price” to defeat harmful inflation, she said.

The Washington-based crisis lender cut its US growth forecast again to 2.9 percent from April’s forecast of 3.7 percent, which was cut from the rate forecast earlier in the year.

The world’s largest economy bounced back strongly from the pandemic downturn, but that comes with “unwanted side effects” from rising prices, Georgieva said.

While the IMF is confident that the Fed’s rate hikes will bring inflation down, “we recognize there is a narrower path to avoiding a recession,” she said in a statement.

The Fed last week made the largest hike in its benchmark interest rate in nearly 30 years as part of its aggressive effort to quell inflation, which is at a four-decade high and is squeezing American families who are struggling with rising gasoline prices, Food and housing are struggling.

The US economy has already seen strong demand, which has met with a supply backlog due to pandemic lockdowns in China and elsewhere as Russia invaded Ukraine, adding to inflationary pressures.

For 2023, growth is projected to slow to 1.7 percent but “nearly avoid” a recession, according to the annual review of the US economy known as the Article IV consultation.

The IMF chief said fighting inflation must be “top priority” despite the impact a US slowdown could have on the global economy.

“Success will be beneficial for global growth over time, but some pain to achieve that success can be a necessary price,” she said in response to a question from AFP.

Georgieva met with US Treasury Secretary Janet Yellen and Fed Chair Jerome Powell, and the officials “left no doubt about their commitment to bringing inflation back down.”

Nigel Chalk, deputy chief of the IMF’s western hemisphere department, said any US recession is likely to be short-lived given the savings stockpile and strong business and household balance sheets and jobs.

“All of these things would help support the economy,” he said. “So if it’s been hit by a negative shock, it should pass relatively quickly and recover relatively quickly thereafter.”

The IMF also urged Washington to lift punitive trade tariffs imposed under former President Donald Trump — something President Joe Biden said he was considering and Yellen appears to endorse.

“Especially at a time when inflation is high and supply chains are strained…we see clear benefits in rolling back the tariffs that have been in place over the past 5 years,” Georgieva said in a statement.

However, US Trade Representative Katherine Tai said the high tariffs on China provide “leverage” for negotiations with Beijing that she is reluctant to give up.

The IMF report says that lifting tariffs on steel, aluminum and a range of products from China “would support growth and help reduce inflation”.

The rapid recovery in the US, supported by low interest rates and strong government support, has had domestic benefits, reducing poverty and creating more than 8.5 million jobs since the end of 2020, according to the IMF analysis.

It also provided a boost to the pandemic-hit global economy, but fund economists warned it will be “difficult” to avoid a recession.

“There is clearly a lot at stake. Misjudging the policy mix – either way – will result in significant domestic economic costs and negative impacts on the global economy.”

However, the report resisted comparisons to the inflationary era of the 1980s, noting that the economy and central bank actions were “distinctly different”.