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IMF backs Fed rate pause citing rising global risks

Global Economy

IMF backs Fed rate pause citing rising global risks

New chief economist Gita Gopinath warns of darkening economic outlook

Gita Gopinath says the Fed’s 'pivot' towards putting 'tightening on hold' will have a positive impact on the US © Greg Kahn/FT

The IMF’s new chief economist has backed the Federal Reserve’s decision to shelve interest rate increases, citing “weakening momentum” and “considerable and rising” risks to the global outlook. 

Gita Gopinath, who took over as the IMF’s top economist at the beginning of the year, flagged up a darkening picture in the euro area and China, as she warned there may have been a contraction in world trade in December. 

But Ms Gopinath said the Fed’s “pivot” towards putting “tightening on hold” would have a positive impact on the US, the world’s largest economy, which is already being helped by the remaining influence of a fiscal stimulus package. 

“The fact that the Fed has put a pause on raising rates is going to provide a lot of support to the economy,” Ms Gopinath said in an interview with the Financial Times. “We endorse the Fed view of having a data-driven approach.”

The Fed last month ditched its guidance signalling further increases in short-term interest rates as it responded to “cross-currents”, including decelerating growth in China and Europe and elevated uncertainty around trade policies. Other institutions including the central banks of India, Australia and the UK have also turned more dovish. 

Ms Gopinath said the shift in Fed policy had also “certainly helped” emerging market economies that had struggled with the tightening financial conditions over the past year. “Emerging market currencies depreciated a fair bit in 2018, and capital flows had really weakened. We are seeing some respite from both.” 

Despite the breathing room provided by the US central bank, Ms Gopinath, a 47-year-old economics professor who arrived at the IMF from Harvard University, stressed lingering concerns about the outlook. Last month, the IMF estimated that the world economy would grow at a rate of 3.5 per cent this year, 0.2 percentage points less than it forecast in October. Some of the biggest downward revisions affected Europe, hitting Germany and Italy.

“In mid-2017 we had this cyclical recovery in the euro area after the big financial crisis . . . that looked good both on the investment side and the consumption side. But that cycle has turned much more quickly than many anticipated,” she said. 

Meanwhile, she said the IMF’s forecasts for the UK had involved a “relatively benign set of events” with regard to Brexit that could no longer be counted on, due to the rising possibility of a no-deal departure from the EU that could produce a trade and financial shock. “The whole nature of this exit, it is just tremendous uncertainty . . . the hope is that there will be resolution soon,” she added. 

On China’s slowdown, Ms Gopinath attributed part of it to declining credit resulting from tighter financial regulation. But the trade war with the US was also a factor, and she urged the two countries to reach a deal to end the tit-for-tat tariff conflict. “A removal of these tariffs and importantly a sense that this is a . . . long-term reversal of tariffs . . . would help not just with China but the whole global outlook,” she said. 

Ms Gopinath is the first woman chief economist at the IMF © Greg Kahn/FT

Ms Gopinath, who was born in Kolkata, India, did her undergraduate studies at the University of Delhi and obtained her doctoral degree at Princeton, is the first woman to be chief economist of the IMF since the institution was created in the aftermath of the second word war.

Christine Lagarde, the IMF’s managing director, was the first woman to lead the organisation — and Ms Gopinath said she gave a “lot of credit” to the former French finance minister for appointing her. “Women have been ready for this job for many years. We’ve been ready for a long time and it takes senior people in institutions to recognise that,” Ms Gopinath said.

She did not think she approached the job any differently because she was a woman. “I come to think of issues, and I come to think of solutions, in the exact same way as any other trained economist.” 

Ms Gopinath, a specialist in exchange rate policies, is known for being pragmatic in her prescriptions on economic and monetary policy, even if it means challenging ideas that are part of IMF orthodoxy, on floating currencies and capital controls in particular, if they do not quite fit the conditions in any given country. “There is a very tight link between what is going to be optimal exchange rate policy, optimal capital flow policy, optimal macroprudential policy,” she said. “We have to look at this holistically — and that would be one of my important priorities,” she added. 

Last year, the IMF provided the largest loan in its history to Argentina, in a $57bn programme that Ms Gopinath judged to have been successful in both stabilising financial conditions and exchange rates, while including special funds to protect the most vulnerable populations from social distress.

One big question now is whether Venezuela might also need IMF support down the road, in a potential scenario in which Nicolás Maduro, its leftwing authoritarian leader, were no longer in power. Ms Gopinath said the situation in the country was being watched closely. “There has been tremendous economic and humanitarian distress in Venezuela and sorting it out is going to require many hands on deck.”

In an age of rising populism around the world, including in the US, Ms Gopinath said it was particularly important for the IMF and other multilateral economic institutions to show their effectiveness.

She was speaking a day before Donald Trump nominated David Malpass, a top Treasury official and a sceptic of multilateralism, as the US nominee for the presidency of the World Bank, the development lender a block away from the IMF. “Very valuable outcomes come about when countries co-operate and when we have a rules based system and that has to be championed,” she said.

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