IMF boss Georgieva says the US will narrowly avoid recession and the Fed needs to stay the course on hiking interest rates

  • The US is likely to narrowly avoid falling into a recession, IMF head Kristalina Georgieva told CBS.
  • Investors are weighing the odds of a US “soft landing” after aggressive Federal Reserve interest-rate hikes.
  • The Fed should stay the course until inflation cools and be careful not to ease up too soon, Georgieva said.

The US economy looks like it will avoid tipping into recession this year despite the Federal Reserve’s aggressive interest-rate hikes, according to the head of the International Monetary Fund. 

Kristalina Georgieva, managing director of the IMF, said Sunday there’s a chance the US central bank can engineer a soft landing — that is, it can bring down the high level of inflation without causing major damage to the economy.

“The US economy is also going to slow down this year. But — at least, based on the data we have today — we think the US would be able to go through the year narrowly avoiding falling into recession,” Georgieva said in an interview on CBS’s “60 Minutes”.

“That means a possibility for a soft landing for the United States,” she added. 

US stocks fell in 2022, as investors fretted about the impact of a potential recession as the Fed’s tightening squeezed consumer spending and business activity. But they rose in January as data showed inflation cooling to its lowest level in over a year, boosting hopes the Fed will ease back on its rate-hike campaign.

The Fed has raised interest rates from near-zero to almost 5% over the past year, in its most aggressive tightening cycle since the 1980s. But it slowed the pace at its meeting last week, delivering a 25-basis-point hike — its smallest since March.

Chair Jerome Powell and the central bank’s other policymakers should stick to their guns on rate rises until the rate of core inflation — which strips out food and energy prices — confirms the cooling, Georgieva said.

“Our advice to the Fed is to stay the course until core inflation starts turning down,” she said.

“The Fed has to be very careful not to start easing financial conditions prematurely,” she added.

Economists such as Larry Summers have suggested more US job losses were needed to really bring down inflation, maybe as much as 1 million. But the US added 517,000 jobs in January, nonfarm-payrolls data on Friday showed — more than double the level estimated.

Georgieva said the strength in the US jobs market probably wouldn’t last.

“Our expectation towards the end of year is to see somewhat weaker labor markets. But let’s be very clear, we are not scared of some big unemployment wave swiping through the United States.”

But in order to do that, the Fed has to stay the course until core inflation starts falling down to avoid the threat that might come with easing financial conditions too early, Georgieva said.”

She also warned that the US defaulting on its debt would be very damaging to the country and the global economy as a whole. But she’s optimistic a default won’t happen and a solution will be found. 

The IMF’s global projections for the year ahead still remain concerning according to the IMF head, but they have improved since the fund’s October forecast thanks to China’s reopening from the pandemic among other reasons. 

“The biggest surprise is that the picture, while it remains very concerning, is less dire than it was just two months ago. We are still going for a year of slowing growth. We’re still going to have interest rates relatively high because inflation hasn’t evaporated. So it is not much better. It is just less bad,” Georgieva said.