IMF lowers US growth forecast, blames Washington

The difference in the 2014 forecast is a result of the IMF’s new assumption that the next year’s sequester will not be turned off. Congress is showing no signs so far of being able to agree on appropriations measures that reverse or change the across-the-board sequestration cuts. 

{mosads}The recovery is “gaining ground and becoming more durable,” Lagarde said, but “the economy has a way to go before it returns to full strength.”

“Fiscal policy presents a major risk,” she said. She said that the 2.5 percent deficit reduction this year is too steep, but she urged the U.S. to adopt a long-term deficit reduction strategy.

Within five years, rising healthcare and pension costs and rising interest rates will expand the budget deficit once more, Lagarde warned.

“It remains essential to adopt a back-loaded plan,” Lagarde said. 

She also urged Congress to “expeditiously raise the debt ceiling,” to avoid the economic turmoil seen in 2011 when Congress and President Obama played a game of brinksmanship over the ceiling. The $16.4 trillion cap will need to be raised in the fall, but House Republicans want to get more spending cuts in exchange for raising it. 

Monetary policy governed by the Federal Reserve poses a secondary risk to the U.S. economy, Lagarde warned.

The IMF assumes the Fed will continue its extraordinary program of pumping $85 billion into the economy per month into next year, and that the quantitative easing tapers off slightly in 2014.

“This needs to be to handled carefully,” she said. She said low growth and low inflation means the easing policy remains sound for now.