Lagarde Calls for Loose Policy, Says Trade Curbs Malpractice

  • Policy makers have more space than believed, Lagarde says
  • Global recovery remains weak and uncertain, IMF chief says

International Monetary Fund Managing Director Christine Lagarde said advanced economies should keep monetary policy loose to boost the fragile recovery, and she described barriers that curb trade as “economic malpractice."

“Monetary policy in advanced economies needs to remain expansive at this stage,” Lagarde said in speech on Wednesday at Northwestern University outside of Chicago. The IMF will present its latest World Economic Outlook next week -- with its latest growth forecasts -- ahead of its annual meetings in Washington.

“Pessimists believe that our traditional tools of monetary and fiscal policy are exhausted, but I beg to differ,” Lagarde said. “In my view, there is more policy space -- more room to act -- than is commonly believed.”

The U.S. Federal Reserve is continuing its efforts to bolster the economy with lower rates. This month the Federal Open Market Committee voted to leave its key interest rate unchanged, though there was an internal split with three policy makers dissenting in favor of an increase. Before the FOMC raised its key rate in December for the first time in almost a decade, the IMF had argued that it was too soon for a hike.

Infrastructure Spending

IMF research has found that monetary stimulus can boost the positive impact on growth of debt-financed investments in infrastructure, Lagarde said.

Lagarde repeated that the IMF will lower its U.S. growth forecast because of setbacks in the first half of the year. Growth in Europe remains “sub-par,” while Japan has experienced a small rebound, she said. Brazil and Russia are starting to stabilize and show improvements.

There’s still considerable uncertainty about the staying power of the global recovery, she said. “Diverging paths of monetary policy in the major economies could trigger a resurgence of financial market volatility,” said Lagarde.

Global policy makers should also be working together for stronger growth, she said. “Good international coordination amplifies domestic effects and generates positive spillovers for the world,” Lagarde said.

Creating trade barriers is a “clear case of economic malpractice," Lagarde said in response to questions from the audience after her speech.

Lagarde warned that continuing a recent trend toward protectionism would choke off “a key driver of growth at a point when the global economy is still in need of every good piece of news it can get.” She reiterated that governments need to ensure the gains from trade are widely shared.

“These are not silver bullets -- none actually exist -- but if we want to keep globalization alive for the next generation, there is no alternative to ensuring that it works to the benefit of all,” Lagarde said.

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