IMF Slashes U.S GDP Growth In 2022 To 2.9%, Says Path To Avoiding A Recession Is 'Narrowing'

The International Monetary Fund has slashed its U.S economic growth forecast because of Federal Reserve's aggressive interest rate hike that is set to weaken demand.

In an annual assessment of US economic policies, the IMF said it now expects US Gross Domestic Product to grow 2.9 percent in 2022, less than its most recent forecast of 3.7 percent in April.

The IMF forecasted that U.S economy will grow at 1.7 percent in 2023 and 0.8 percent in 2024. After contracting by -3.4 percent in 2020, the U.S economy grew by 5.7 percent in 2021.

"Based on the median projection for the policy rate published at the June FOMC (Federal Open Market Committee) meeting, we expect the U.S. economy will slow in 2022-23 but narrowly avoid a recession." IMF said.

"The expected slowing of U.S. demand, combined with the needed tightening of global financial conditions, has significant potential to negatively impact individuals, firms, and countries that are leveraged in U.S. dollars and/or that face sizable near-term funding needs." it further said.

The IMF said that the priority for U.S decision makers must be to expeditiously slow wage and price growth without precipitating a recession.

The IMF added that U.S returning to price stability will require an assertive and rapid withdrawal of monetary accommodation.

"To decisively bring inflation back to the Federal Reserve’s 2 percent goal by late 2023/early 2024, will require both raising the policy rate above neutral, in ex ante real terms, and keeping it there for some time. Given the scope of the current inflation problem." IMF observed.

"We believe the path for the policy rate that the Fed has signaled, to quickly get the federal funds rate to 3½ to 4 percent, is the correct policy to bring down inflation. We believe this policy path should create an up-front tightening of financial conditions which will quickly bring inflation back to target. We also support the Fed’s decision to reduce its balance sheet." IMF Managing Director Kristalina Georgieva said while making her opening remarks at the 'United States 2022 Article IV' press conference

The Fed’s policy rate is currently in a range of 1.50 per cent to 1.75 per cent.

"We are conscious that there is a narrowing path to avoiding a recession in the U.S. We also have to recognize the uncertainty of the current situation. The economy continues to recover from the pandemic and important shocks are buffeting the economy from the Russian invasion of Ukraine and from lockdowns in China. Further negative shocks would inevitably make the situation more difficult." Georgieva added.