IMF chief sees potential for more Fed rate cuts, keeping close eye on inflation

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By Andrea Shalal

WASHINGTON (Reuters) -The U.S. Federal Reserve could further lower interest rates this year, but will have to calibrate carefully between easing growth prospects and signs that disinflation is stalling, International Monetary Fund chief Kristalina Georgieva told Reuters.

Georgieva, managing director of the IMF, said the U.S. economy had proven resilient and outperformed most expectations with second quarter growth of 3.8%, and consumer demand was still holding strong despite indications that hiring was not as strong.

“It is a picture that is not very clear,” Georgieva said in an interview on Wednesday. “So in this environment, given that disinflation is stalling, but also the economy may be softening a bit, it is very important for the Fed to get it right.”

The Fed cut its rate by a quarter percentage point at its September meeting, a move Fed Chair Jerome Powell and others characterized as a way to leave policy tight enough to still restrain the economy and put downward pressure on inflation, while also providing a looser policy outlook that could help insure against rapid weakening of the job market.

Georgieva said the IMF was keeping a close eye on emerging data, adding that the U.S. inflation outlook would become “a bit more concerning” if services inflation – which had settled at around 1% above its pre-COVID levels – was coupled with greater pass-through of higher tariff costs.

Thus far, she said, consumers had not felt the full heat of U.S. President Donald Trump’s imposition of high tariffs because companies had built up stocks before the duties were raised, and some companies with ample profit margins were eating the cost.

The trade-weighted tariff rate was now around 17.5%, below the 23% expected in April, but the effective tariff rate – a broader measure of what is actually collected – was below 10% for now, Georgieva said.

But it was unclear if this would be sustained, given that tariff rates were still fluctuating, and some companies had less profit buffer to avert passing the full brunt of tariffs onto consumers, Georgieva said.

She said the sector to watch would be lower-end consumer goods and whether buyers changed their behavior if prices went up. “This is still an unfolding story … so we need to continue to watch it very carefully,” she said.

Georgieva said Trump’s tariff hikes came after decades of very low tariffs in the United States and moves until about a decade ago among other countries to lower their own duties. 

Trump’s shifting of that equation had moved the global economy to become more truly multi-polar, with many countries now exploring cooperation with regional partners or plurilateral agreements with other regions.

That new world was likely here to stay, she said.

“I don’t think that we are going to just switch to the world we had, if you wish, pre-COVID before all these shocks came and hit us,” she said. “I see huge potential in places like ASEAN, like the Gulf, in the subregions of Africa where there are strong economies, to move in this direction of more regional integration in trade, in financial services, and that, I think, is a good thing.”    

(Reporting by Andrea Shalal; Editing by Andrea Ricci)