Fed in focus as IMF cuts U.S. growth outlook, cites tighter monetary conditions

London (Jan 25)  The International Monetary Fund cut its global growth outlook for 2022 to 4.4%, with the most significant downward revisions reported in the world's two largest economies — the U.S. and China.

The updated global growth outlook is 0.5 percentage points less than previous estimates. IMF's World Economic Outlook (WEO) report pointed to the growing number of Covid-19 cases, supply chain disruptions and higher inflation as the main reasons behind its downgrade.

"The global economy enters 2022 in a weaker position than previously expected," the report stated. "Global growth is expected to slow to 3.8 percent in 2023. Although this is 0.2 percentage point higher than in the previous forecast, the upgrade largely reflects a mechanical pickup after current drags on growth dissipate in the second half of 2022."

In the U.S., the GDP is now said to grow 4% in 2022, which is 1.2 percentage points lower than previously thought. The IMF highlighted the Federal Reserve's aggressive monetary policy tightening, supply chain disruptions, and Build Back Better fiscal package removal.

"Among changes to advanced economy forecasts for 2022, a revised assumption removing the Build Back Better fiscal policy package from the baseline, earlier withdrawal of monetary accommodation, and continued supply chain disruptions have contributed to a downgrade of 1.2 percentage points for the United States," the report said.

In December, the Fed announced that due to more persistent inflation and growing wage pressures, it was time to accelerate tapering of its asset purchases while signaling at least three rate hikes in 2022.

In light of this, the IMF said that tighter monetary policy conditions would have domestic and global consequences. "Less accommodative monetary policy in the United States is expected to prompt tighter global financial conditions, putting pressure on emerging market and developing economy currencies. Higher interest rates will also make borrowing more expensive worldwide, straining public finances," the report noted.

All eyes are now on the Fed's monetary policy announcement, which is scheduled for 2 p.m. ET on Wednesday and will be followed by the central bank Chair Jerome Powell's press conference at 2:30 p.m.

The report warned that the Fed could be forced to be more hawkish going forward due to inflation pressures.

"Inflation could turn out higher than expected. A different policy stance will be required if circumstances change. Communicating such changes will be a delicate task and risks prompting strong market reactions that could, in turn, result in tighter financial market conditions," the IMF said. "Any miscommunication or misunderstanding of such changes may provoke a flight to safety, raising spreads for riskier borrowers. This may put undue pressure on emerging market currencies, firms, and fiscal positions."

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