[Comprehensive] "More Pessimistic Next Year" IMF Managing Director Warns of Recession, Fed Prepares for Slowdown

Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF)
[Image source=EPA Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] "2022 will be a difficult year. However, 2023 could be even tougher. The risk of a recession in 2023 has increased."

Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF), warned of the possibility of a global recession next year. She also confirmed plans to soon revise downward this year's economic growth forecast. Soaring inflation, interest rate hikes, and China's slowing growth are cited as the underlying reasons.

◇IMF Managing Director: "Cannot Rule Out Recession"

In an interview with major foreign media on the 6th (local time), Georgieva mentioned global inflation, interest rate hikes, China's economic slowdown, and sanctions following Russia's invasion of Ukraine, stating that "the outlook has darkened significantly since the last update in April." She said, "We are now in very choppy waters."

When asked whether a global recession could be ruled out, she replied, "The risk is increasing, so it cannot be ruled out." She noted that recent economic data confirm that some countries, including China and Russia, experienced contraction in the second quarter, diagnosing that "2022 will be a difficult year. However, 2023 could be even more challenging." She also added that the risk of recession next year has increased.

The IMF plans to release a revised economic growth forecast for 2022 within a few weeks. Georgieva stated that the growth outlook will be revised downward. Previously, in the World Economic Outlook report released in April, the IMF lowered this year's forecast from 4.4% in January to 3.6%. If lowered this time, it would be the third downward revision this year.

On the same day, an inversion phenomenon appeared in the New York bond market, where short-term interest rates exceeded long-term rates. The inversion, where the 2-year Treasury yield, a short-term bond, is higher than the 10-year Treasury yield, the benchmark for long-term market rates, is generally considered a precursor to a recession. On the same day, Jeremy Siegel, a professor at the Wharton School of the University of Pennsylvania, stated, "We are in a recession. There is no doubt," pointing out that regardless of the official judgment by the National Bureau of Economic Research (NBER), the U.S. will record two consecutive quarters of negative growth.

◇Fed Prepared for Economic Slowdown, Reaffirms Tightening

There are also increasing opinions that some degree of economic slowdown must be accepted considering the urgency of 'price stability.' Georgieva also emphasized the importance of controlling soaring inflation. Considering the urgency of 'price stability,' some degree of economic slowdown is "an essential price to pay."

Earlier, the Federal Reserve (Fed) raised the benchmark interest rate by 0.75 percentage points at the June Federal Open Market Committee (FOMC) meeting, the largest increase in 28 years, as a drastic measure to curb inflation. According to the minutes of the June FOMC meeting released that day, participants agreed that "it is appropriate to move toward a restrictive policy stance given the economic outlook." Many participants expressed strong concerns that high inflation could become entrenched.

Jerome Powell, Chairman of the U.S. Federal Reserve (Fed)
Photo by AP Yonhap News

Of course, concerns were also raised within the Fed that high-intensity tightening could cause economic growth to slow. The minutes stated, "Participants recognized that the strengthened (tightening monetary) policy could slow economic growth for some time," but also noted, "They viewed the return of inflation to the 2% target as important for achieving maximum employment on a sustained basis."

After the release of the minutes, market expectations that the Fed would take a giant step at the July meeting increased significantly. According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds (FF) futures market currently reflects a 96.3% probability of a 0.75 percentage point rate hike in July. This is higher than the previous day (83.8%) and the previous week (87.3%).

Major foreign media reported that "a decision to raise interest rates enough to impose some burden on the economy has been confirmed." TD Securities interpreted that the Fed's tightening stance despite growth slowdown risks is relatively hawkish.