The head of the International Monetary Fund on Thursday endorsed the Federal Reserve’s reluctance to lower interest rates this week, saying the risk of cutting borrowing costs too soon outweighs the danger of waiting too long to act.
The Fed is nearing the end of its anti-inflation fight, but the central bank recognizes it has not quite finished the job, said Kristalina Georgieva, the managing director of the IMF. The first rate cut is probably “months” but not “many months” in the future, she said.
The pace of eventual Fed rate cuts could have significant effects on the global economy, according to Georgieva, a Bulgarian economist who took the fund’s top job in 2019 after holding senior positions at the World Bank and European Commission.
“The timing of U.S. easing of monetary policy is indeed very important. Not too early, but also not too late,” Georgieva said. “… So on the balance of risks, this is one that still the Fed is right to be cautious about. But don’t keep it tight if you don’t have to. Look at the data. Act on the data.”
The IMF chief spoke at an annual roundtable with journalists, The Washington Post reported.
Seeking to cool off the economy, the Fed in 2022 began raising the federal funds rate, its main policy tool, from near zero to its current level between 5.25 and 5.5 percent. Annual inflation has fallen from 9.1 percent in June 2022 to 3.4 percent in December.
Rushing to cut interest rates would put those gains at risk, Georgieva said. But waiting too long could damage economies where central banks already have begun reducing their interest rates, such as Brazil, Chile and Colombia. Higher U.S. interest rates would draw investment away from countries where rates are lower, which would in turn depress the value of their currencies and probably increase their inflation rates.
The Fed this week left its benchmark interest rate unchanged. Fed Chair Jerome H. Powell also disappointed investors by downplaying chances of an initial rate cut at the central bank’s March meeting. Many on Wall Street in recent weeks had become convinced that the Fed would soon start cutting, which would lift stock values.
Central banks around the world face similar pressures from financial markets. But Georgieva said they should be guided by economic data, “not by exuberant expectations of markets.”
Economists debate how much credit the Fed deserves for the slowdown in consumer price increases. Some say that improvements in the operations of global supply chains and the greater availability of workers explain the cooling of inflation more than the Fed’s push to hike interest rates.
Despite those moves, which have made borrowed money more expensive for consumers and businesses, the U.S. economy continues to chug along, growing at an annual rate of 3.3 percent in the final three months of 2023.
That performance surprised most Wall Street forecasters, who had anticipated a recession last year. The United States defied predictions of a slump thanks to robust spending by consumers and the federal government, Georgieva said.
Consumers relied on savings they had accumulated during the pandemic. And Washington began writing checks for new infrastructure and green energy projects, she said. The U.S. economy also benefited from being home to the most technologically advanced companies, such as the “Magnificent Seven” that have driven recent stock market gains: Apple, Microsoft, Amazon, Alphabet, Meta Platforms, Tesla and Nvidia. (Amazon founder Jeff Bezos owns The Washington Post.)
“In a world of rapid technological change, it gives a competitive edge to the U.S.,” she said.
Below the surface of the economy, however, higher rates are taking their toll, especially on small and midsize businesses. Weakness in the U.S. commercial real estate market is spreading through its effects on foreign banks that have invested in office projects.
“So, while our baseline and our conviction is that we are poised for a soft landing, it’s not done. We are still 50 feet above ground,” Georgieva said. “And we know that until you land, it’s not over.”
