IMF: No Significant Slowdown in Lending to Prompt Fed to Change Rate-Hiking Course

The U.S. Federal Reserve has not changed its path on the current cycle of rate hikes due to a major slowdown in lending, according to the International Monetary Fund (IMF).

In an interview with CNBC’s Karen Tso in Dubrovnik, Croatia, IMF Managing Director Kristalina Georgieva said that although some lending has slowed, it has not reached a level that would prompt the Fed to take a backseat. Georgieva stressed how unpredictable the environment is and suggested remaining alert and flexible so that you can alter course if trends shift.

The Federal Reserve issued a warning about lenders’ worries about upcoming circumstances in a report on banks from May. Due to difficulties experienced by mid-sized financial institutions in the US, banks have tightened their lending criteria for both consumers and companies. The Fed’s loan officers believe that these problems will continue over the next year because of revised growth projections, worries about deposit withdrawals, and a decrease in risk tolerance.

Following comments made by the IMF’s Chief Economist, Pierre-Olivier Gourinchas, in April, the agency has provided its estimate of the rate of the global lending slowdown. According to Gourinchas, banks are presently in a “more precarious situation,” endangering the IMF’s projection of 2.8% global growth for this year.

In order to combat the rising inflation, several significant central banks throughout the world, notably the U.S. Federal Reserve, have adopted a more aggressive monetary policy. But according to the Institute of International Finance, the level of global debt has increased to around $305 trillion, which is getting close to a record high. Concerns about excessive debt levels and interest rates were noted in the IIF’s May report, which added to worries about financial system leverage.

Further rate rises may be necessary, according to Georgieva, given that the IMF has not seen a severe slowdown in lending that would force the Fed to alter its path and the solid U.S. employment data. She believes that more rate increases by the Fed will cause the unemployment rate in the United States to rise over 4%, maybe to 4.5%. May saw a 3.7% increase in the unemployment rate, the highest level since October 2022.

Georgieva views President Joe Biden’s signing of a debt limit measure by the US government as a generally beneficial development in the existing situation. She does, however, point out that the ongoing discussion about the debt limit is counterproductive and urges us to reevaluate our approach to solving the problem.