In the fight against inflation, the Federal Reserve can still thread the needle by engineering a soft landing — as well as cooling an overheated economy without crashing the labor market.
in interview with 60 minutes Broadcast on Sunday, the head of the International Monetary Fund said conditions in the US were looking much less dire than they were a few months ago.
“At least based on the data we have today, we think the US will be able to end the year narrowly enough to avoid falling into recession,” IMF Managing Director Kristalina Georgieva told the CBS weekly news program. “It means the possibility [is there] for a soft landing in the United States.
Back in October, Georgieva’s organization was singing a very different tune.
It predicted the countries, accounting for as much as a third of global output in 2023, were warned “the worst is yet to come”.
In the latest IMF report published last week, it predicted that global inflation had peaked and would now ease to 6.6% in 2023 and 4.3% in 2024, down from 8.8% in 2022.
Yellen also downplays the risks
Georgieva’s renewed optimism was echoed by the US government on Monday.
talking to abc good Morning AmericaTreasury Secretary Janet Yellen underestimated the risk of the US economy contracting.
The former Fed chair in charge of US fiscal policy on Friday cited a strong increase in January non-farm payrolls and a historically low unemployment rate as signs of a strong labor market.
“You don’t have a recession when you have 500,000 jobs and the lowest unemployment rate in more than 50 years,” Yellen told the program.
Given such strong US jobs market data, the IMF’s Georgieva urged Fed Chair Jay Powell to resist any pressure from Wall Street to hold back on his interest rate hikes.
In his view, it was important to stay the course until the trajectory for inflation was pointed downward.
“The Fed has to be very careful not to start easing financial conditions prematurely,” the Bulgarian economist said.
A black swan cannot be ruled out – a possible US debt default
This would naturally mean that the red-hot labor market would have to weaken somewhat to prevent a vicious cycle of inflation, which leads to demand for higher wages, which in turn leads to further inflation.
But the threat of local layoffs in the tech sector appeared to be abating, primarily through the broader economy.
“Let’s be very clear,” said the Bulgarian economist, “we are not afraid of some huge unemployment wave spreading across the United States.”
However, there was an American black swan concerning Georgieva, and that was the ongoing negotiations in Washington to raise the federal government’s debt ceiling, which currently stands at less than $31.4 trillion.
Yellen warned House Speaker Kevin McCarthy last month that he needed to raise the ceiling before June to prevent the US from defaulting on its obligations to creditors.
According to the IMF boss, if there’s one thing everyone should have understood by now between the once-in-a-century pandemic and Russia’s invasion of Ukraine, it’s that the seemingly unimaginable can happen.
“That is why it is so important for all concerned to take this conversation very seriously,” she argued. “If people don’t like inflation today, they won’t like what may happen tomorrow.”
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