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Resilient U.S. Economy Absorbs 75% of Fed Hikes, IMF Reports

Janesmith

2024-01-17

In a recent statement at the World Economic Forum, the International Monetary Fund (IMF)’s Deputy Managing Director, Gita Gopinath, revealed that about 75% of the transmission from monetary policy has already impacted the U.S. economy. This hint at the resilience of the U.S. economy suggests its potential to withstand varying economic pressures. With such a significant percentage of Fed hikes already absorbed, it provides a promising outlook towards the economy’s ability to manage future financial challenges.

The euro area, however, has a different trajectory to follow. According to Gopinath, due to the fact that the euro area commenced rate hikes at a later stage, it still has more impact to contend with. This implies that the economy of the euro area has a larger proportion of the monetary policy transmission yet to be experienced in comparison to the U.S. economy.

In contrast to Gopinath’s statement, François Villeroy de Galhau, governor of France’s central bank, holds a different view. He voiced his belief that the feed-through from monetary policy decisions to financial conditions in the euro zone was more or less complete. This suggests that, according to de Galhau, the euro zone has already encountered the primary impacts of the monetary policy shifts and is now moving towards a phase of stabilization. These contrasting views present an interesting landscape for the future of the euro zone’s economy.

According to an evaluation by the International Monetary Fund (IMF), approximately three-quarters of the effects of a more stringent monetary policy have already permeated the U.S. economy. This analysis underscores the robustness of the American economy, affirming its capacity to adapt to shifts in monetary policy. The IMF’s findings imply that the U.S. economy has already weathered the majority of changes triggered by Fed rate hikes, further reinforcing the optimistic perspective on its ability to navigate potential economic headwinds in the future.

“We have to recognize that there has been a lot of resilience in the economy despite the rate hikes that we have seen … our estimate is that for the U.S. about three quarters, or 75%, of the transmission has already gone through, and the rest will go through this year,” the IMF’s Deputy Managing Director Gita Gopinath said at a CNBC-moderated panel at the World Economic Forum on Tuesday.

Gopinath added that a greater level of transmission remains to filter through in the euro area, where the initiation of interest rate hikes took place at a subsequent time compared to the U.S. economy. The delay in implementing monetary policy adjustments means that the euro area is still in the process of experiencing the full impact of these changes. This situation could potentially lead to a more prolonged period of economic adjustment and a slower pace of recovery compared to economies that initiated rate hikes earlier. Nevertheless, this gradual approach may allow the euro area to absorb the shifts in a more controlled manner, mitigating the risk of sudden economic shocks. This pending transmission underscores the ongoing challenges that the euro area must navigate in the coming years.

The U.S. economy has showcased surprising resilience, maintaining stronger growth than anticipated since the hike in interest rates commenced in March 2022. In spite of this, several strategists have raised concerns about a potential recession looming on the horizon this year. The uncertain economic climate has led to a heightened sense of awareness and caution in financial circles.

On the other hand, the Eurozone economy has been grappling with stagnation. The European Central Bank initiated a series of rate hikes in July 2022, but the expected growth spurt is yet to materialize. The sluggish pace of the Eurozone’s economic recovery has been a point of contention among economists, who are closely monitoring its trajectory and potential implications for the global economy.

“What is universally true is we have households and corporations with stronger balance sheets. And we’ve seen effects, but we’ve also seen resilience,” Gopinath said on the panel.

“Labor markets are slowing but at a much more gradual pace. Which is why I think at the IMF we feel that a soft landing scenario, the probabilities have come up quite a bit, because inflation has come down without needing that much of a loss in terms of economic activity.”