IMF chief defends rate hikes after Trump slams ‘crazy’ Fed

Vastavam web: IMF chief Christine Lagarde on Thursday defended central bank rate hikes in a veiled rebuke to Donald Trump after the US president blamed “crazy” Fed policies for contributing to financial market turmoil. Lagarde’s comments came as a global market sell-off rolled on following Trump’s comments, underscoring rising financial volatility that the IMF will address at its annual meetings this week in Bali.

Lagarde said central bank rate increases such as those by the policy-setting US Federal Reserve were justified by fundamentals. “It’s inevitable that central banks make the decisions that they make.” Following a sharp Wall Street sell-off on Wednesday, Trump said the Federal Reserve “is making a mistake.” “I think the Fed has gone crazy,” he said. Trump has repeatedly touted Wall Street records as proof of the success of his economic programme including his confrontational trade strategy, and has frequently criticised the Fed for gradually raising interest rates, which could press the brakes on equity markets.

The global financial elite are on the Indonesian holiday island for a week of discussions clouded by the economic outlook. Much of the global angst has been dominated by Trump’s escalating tariff war with China and his disdain for world trading norms. But higher US interest rates have also helped send emerging market currencies into a tailspin, as countries that borrowed heavily in dollars race to pay back debt. On Wednesday, Lagarde said world leaders should fix global trading systems instead of tearing them down, in response to nationalist politicians pushing tariffs and protectionism.

Combined with the trade tensions, this had created “a bit of an unprecedented situation” for the world economy, she said. “Clearly as a result of (rate hikes)… we see and we will continue to see capital flow movements,” she added. “The fact that large central banks of advanced economies are not exactly all moving at the same pace is also probably accelerating that phenomenon.” She reiterated her call for the world to come together to address the challenges. “De-escalate, fix the system, and don’t break it,” she said. The head of the World Trade Organization warned that a “full-blown commercial war” could shrink global trade by nearly 18 per cent and also knock worldwide GDP, hurting the United States, China, and others.

Lagarde said she would meet Pakistani officials on Thursday, with expectations that Islamabad will request a bailout of its shaky economy. Pakistan faces a looming balance-of-payments crisis, with Prime Minister Imran Khan saying it needs USD 10-12 billion. “I’m assuming that there might be a programme request on their part, but that has not been discussed and we will explore that this afternoon,” she said.