IMF head warns US that strength of the dollar could harm many economies

Georgieva says many around the world are concerned about how long the US Fed will be stuck with higher interest rates

Managing director of the International Monetary Fund Kristalina Georgieva: 'How long will the Fed be stuck with higher interest rates?'

The head of the International Monetary Fund warned the US that the global economy is closely watching interest rates and industrial policies given the potential spillovers from the world’s biggest economy and reserve currency.

“All eyes are on the US,” Kristalina Georgieva said in an interview. The two biggest issues, she said, are “what is going to happen with inflation and interest rates” and “how is the US going to navigate this world of more intrusive government policies”. 

The sustained strength of the US dollar is “concerning” for other currencies, particularly the lack of clarity on how long that may last. “That’s what I hear from countries,” said the leader of the fund, which has about 190 members. 

“How long will the Fed be stuck with higher interest rates?” Ms Georgieva was speaking on the sidelines of the IMF and World Bank’s spring meetings in Washington, where policymakers have been debating the impacts of Washington and Beijing’s policies and their geopolitical rivalry.

Ms Georgieva said the IMF is optimistic that the conditions will be right for the US Federal Reserve to start cutting rates this year. “The Fed is not yet prepared, and rightly so, to cut,” she said. “How fast? I don’t think we should gear up for a rapid decline in interest rates.”

The IMF chief also repeated her concerns about China devoting too much capital and labor toward export-oriented manufacturing, causing other countries, including the US, to retaliate with protectionist policies. “If China builds overcapacity and pushes exports that create reciprocity of action, then we are in a world of more fragmentation not less, and that ultimately is not good for China,” Ms Georgieva said.

“What I want to see China doing is get serious about reforms, get serious about demand and consumption,” she said. A number of countries have recently criticised China for what they see as excessive state subsidies for manufacturers, particularly in clean energy sectors, that might flood global markets with cheap goods and threaten competing firms.

US Treasury Secretary Janet Yellen hammered at the theme during a recent trip to China, repeatedly calling on Beijing to shift its economic policy toward stimulating domestic demand.

Chinese officials have acknowledged the risk of overcapacity in some areas, but have largely portrayed the criticism as overblown and hypocritical, coming from countries that are also ramping up clean energy subsidies.

Energy

Meanwhile, a jump in energy prices would pose a less acute danger to inflation in Europe than the gyrations in commodities markets seen in recent years, according to European Central Bank Governing Council member Klaas Knot.

Describing current risks to consumer prices as “becoming more balanced”, the Dutch official said that inflation is subsiding toward 2% across the eurozone. 

“Now, if we have an oil shock, it will be against a backdrop of general disinflation in all other factors,” he said in Washington. “The likelihood of significant second-round effects, I would argue, is smaller but it is clearly something to monitor.” 

Mr Knot and his colleagues are preparing to lower interest rates at the ECB’s next meeting in seven weeks, though many are cautious about moves beyond that. 

Bloomberg