IMF more optimistic than Fed, seeing US inflation at 2% in 2025

Managing director Kristalina Georgieva says fund expects US central bank to cut rates once this year before more cuts in 2025

IMF managing director Kristalina Georgieva. EPA

The International Monetary Fund on Thursday presented a more “optimistic” path to US price stability than the Federal Reserve, projecting inflation would return to 2 per cent next year.

IMF managing director Kristalina Georgieva said the fund was more optimistic than the US central bank because consumer spending – boosted by savings during the Covid-19 pandemic – may be slowing down.

In contrast, the Fed's monetary policy committee projects inflation to return to its 2 per cent target some time in 2026.

“Last year we were a bit more optimistic," Ms Georgieva told reporters at IMF headquarters in Washington.

"We have proven to be right. Maybe we will be right next year, 2025, as well."

She was speaking after the conclusion of the IMF's Article IV Consultation with the US. The IMF holds a consultation with the US once a year to assess the status of its economy.

While the fund offered a more optimistic path on inflation, its projections for the labour market were more pessimistic.

It anticipates the US unemployment rate to end at 4.2 per cent this year, as opposed to the Fed's 4.0 per cent estimation.

Unlike other central banks, the Fed has a dual mandate of price stability and maximum unemployment.

It has kept its target range steady between 5.25 and 5.50 per cent since last year after aggressively raising rates in reaction to a global surge in inflation.

Ms Georgieva said the Fed should wait to withdraw from the policy until at least late this year, adding the fund projects one rate cut in 2024 and further rate cuts in 2025.

Her remarks broadly echo the consensus among Fed officials in recent weeks. They appear willing to hold off on cutting rates until later this year.

She acknowledged the global importance of the Fed's actions, noting high US rates can increase debt-servicing burdens for countries “who find themselves in dollars”.

“And what we also know is that when the interest rates are high, the dollar is high," she said.

"The flip side of it is many national currencies appreciate, making it harder for countries with depreciating currencies to fight inflation on their own."

IMF presses US on vulnerabilities despite economic strength

The IMF warned the US on a number of issues including trade restrictions, fiscal deficits and vulnerabilities exposed by last year's banking crisis despite the country's resilient economy.

Ms Georgieva said the US economy has been “has been remarkably strong”.

She said the US is the only country from the Group of 20 whose gross domestic product exceeds pre-pandemic level.

The IMF projects the US economy to grow by 2.6 per cent this year, slightly down from its previous 2.7 per cent estimation.

But there are notable risks despite this strength.

In particular, the Fund noted the country's rising debt levels, recent trade restrictions and vulnerabilities exposed by last year's banking crisis.

Noting a “pressing need to reverse the continuing increase in public debt-to-GDP ratio”, the IMF expects general government debt to exceed 140 per cent of GDP by 2032.

It said these deficit and debt levels pose growing risks to the US and global economy.

The fund made several suggestions to address these issues, including a progressive tax system, eliminating a number of tax expenditures and reforming some entitlement programmes.

Ms Georgieva said the US debt level is sustainable, but suggested: “If you can bring it down, you will have even stronger path for the future."

She said Washington should move to address these concerns while economic conditions are favourable.

“The US economy is very strong, and it is in good times where you can do more to prepare yourself for this in the future,” she said.