The International Monetary Fund cut its forecast for the US economy's annual growth in 2022 and 2023, warning that surging inflation poses "systemic risks" to the country and the global economy.
The gross domestic product of the world's largest economy is now projected to grow 2.3 per cent this year, compared with a 2.9 per cent forecast last month, the Washington-based lender said after concluding its consultation with the US on Tuesday.
The US economy's growth is also expected to slow to 1 per cent in 2023, down from a previous forecast of 1.7 per cent, according to IMF estimates.
Consumer price inflation (CPI) rose to 9.1 per cent year-on-year in June, the highest since 1981, up from 8.6 per cent in May. However, core inflation decelerated slightly to 5.9 per cent in June, from 6 per cent in May, data released on Wednesday showed.
The IMF's executive directors said that a broad-based surge in inflation is "posing systemic risks to both the United States and the global economy".
"Policy priority must be to expeditiously slow price growth without precipitating a recession."
A strong US hiring report for June released last week highlighted the sharp contrast between the healthy labour market and the rest of the economy. Inflation has soared to 40-year highs, consumers are increasingly gloomy, home sales and manufacturing are weakening and fears of a recession are mounting.
The IMF expects unemployment in the US to rise to 3.7 per cent this year, compared with its earlier forecast of 3.2 per cent.
The fund estimates the jobless rate will increase to 4.6 per cent in 2023, before exceeding 5 per cent in 2024 and 2025.
"Avoiding a recession in the United States is becoming increasingly challenging and ... the Russian invasion of Ukraine, the lingering Covid-19 pandemic and supply side constraints create additional challenges," the IMF said.
Calibrating a response to inflation comes with "high stakes" and misjudging the policy mix — in either direction — will result in "sizable costs" at home and negative spillovers to the global economy, the IMF's executive directors said in the report.
The US Federal Reserve has moved aggressively to tackle the hottest inflation in 40 years, raising interest rates by 75 basis points last month — the single-biggest increase since 1994. The central bank will meet again this month on July 26-27 and is expected to raise rates again.
These policy actions "will slow the growth in consumer spending to around zero by early next year, easing the strain on supply chains", Andrew Hodge, economist at the IMF Western Hemisphere Department, said in a separate report.
"Higher mortgage rates will reduce housing prices, which have grown strongly during the pandemic. Finally, slowing demand will increase unemployment to around 5 per cent by the end of 2023, which should decrease wages," Mr Hodge said.
In their recommendations, the IMF executive directors called for passing the rest of US President Joe Biden's social and climate reform agenda that will be crucial to "foster the supply side of the economy and contribute to reduce inflation".
They called on the US authorities to continue making the case for a stronger social safety net and for changes to tax, spending, and immigration policies that would foster labour force participation, investment, and innovation.
Directors also recommended "rolling back the trade restrictions and tariff increases that were introduced over the past five years". The Trump administration had imposed tariffs on Chinese goods, steel, aluminium and other products ― a measure that has been retained by the Biden administration.
The IMF directors also called on the US authorities to work actively with trading partners to strengthen the rules-based multilateral trading system centred around the World Trade Organisation.