Europe Economy

US Federal Reserve is 'doing a fine job,' IMF's Zhang says

Key Points
  • The U.S. Federal Reserve has come under fire in recent months from President Donald Trump
  • Trump has pressed for lower interest rates in order to stimulate growth
  • The International Monetary Fund's deputy managing director defended the Fed's policy stance.
Chris Wattie | Reuters

The U.S. Federal Reserve has come under fire in recent months from President Donald Trump who has pressed for lower interest rates in order to stimulate growth, but the International Monetary Fund's deputy managing director has defended the Fed's policy stance saying it was appropriate.

"We consider what the Fed has been doing is consistent with the approach (that's) data dependent and (done) through well-communicated statements with the market," IMF Deputy Managing Director Tao Zhang told CNBC Monday.

"I think they're doing a fine job at this moment and we hope they continue to do that job down the road," he told CNBC's Karen Tso in Dubrovnik, where the IMF and Croatian Central Bank are holding an event on Central and Eastern Europe.

Zhang's comments come as central banks — the U.S. Federal Reserve and European Central Bank — signal that they could opt for looser monetary policies amid concerns of slowing economic growth.

The Fed is widely expected to cut rates at its July monetary policy meeting after Chairman Jerome Powell signaled last week that the central bank is worried about economic weakness and that it will act as "appropriate" to sustain the recovery.

The Fed's policy approach appropriate for US economy, IMF official says

Powell and the Fed have come under overt pressure from President Trump to cut rates amid economic uncertainty caused by an ongoing trade war with China. The IMF's Zhang supported the Fed's approach, however.

"At this moment, we consider their (the Fed's) approach as appropriate for the U.S. economy and we do urge everybody, and particularly those major central banks and other policy makers, to follow the same approach which is well communicated to the markets and data dependent," he said.

The acting Managing Director of the IMF, David Lipton has backed an accommodative monetary policy arguing that "if the economy needs support, you provide support". In an interview with the Financial Times on Sunday, Lipton said easier monetary policy makes sense "in light of sluggish growth and downside risks."

Zhang said that the IMF predicts a pick-up in global growth in 2020, forecasting 3.6% growth in 2020 after an expected 3.3% growth in 2019. Zhang said the forecast is "precarious," however, and supported a case for a data-driven approach by central banks.

"Growth is recovering, particularly for the second-half of the year, and we're looking for a better result for 2020 so in that sense we're in a process of recovery. At the same time, we are facing the risk tilting to the downside," Zhang noted.

International Monetary Fund (IMF) Managing Director Christine Lagarde smiles during a press conference in Kuala Lumpur on June 24, 2019.
Mohd Rasfan | AFP | Getty Images

Leadership change

It's likely that Christine Lagarde, the erstwhile managing director of the IMF and a former finance minister of France, will take over as head of the ECB when Mario Draghi leaves the post end of October. Lagarde's nomination to head the ECB now has to be approved by EU leaders but this is likely to happen without a hitch.

As for her replacement at the IMF, the current Governor of the Bank of England Mark Carney has been mooted as a contender for the post. It's something of an informal tradition that the head of the World Bank is an American while a European takes the IMF role. There have been calls for more candidates from emerging markets to lead the IMF, however.

Zhang said the selection process was based on merit and qualifications for the job rather than where the applicants come from. Zhang declined to answer whether he would like the top job.

Every country needs to get its fiscal house in order: Croatia central bank chief

Croatian National Bank Governor Boris Vujčić told CNBC Monday that Lagarde could use her background in politics to promote structural reforms in Europe that stimulate competitiveness and growth.

"We always talk as central bankers about structural reforms and this is one thing that politics has to do and she is in a good role to try to convince politicians to do (reforms)," he told CNBC's Karen Tso Monday.

"Monetary policy can do a lot but it only has its own mandate and it cannot do more than it can," he said.

'Very pleased' about Lagarde's ECB nomination: Croatian prime minister

There has been some criticism that Lagarde has a political rather than economic background but Croatia's Prime Minister Andrej Plenković told CNBC that she would "give a new impetus" to the central bank.