IMF's Gopinath: High US deficits fueling demand, global growth, higher rates and US Dollar
First Deputy Managing Director of the International Monetary Fund (IMF), Gita Gopinath, said on Saturday that the United States needs to raise revenues to bring down high budget deficits, even though they are helping to fuel global growth by stoking domestic US demand.
Key quotes
"The high levels of deficits are also supporting growth and demand in the U.S. that have positive spillover to the rest of the world.”
"But along with that growth, you're getting higher interest rates and a stronger dollar and the second two are creating more complications for the world.”
“IMF's estimates that the U.S. deficit for 2024 will reach 6.67% of GDP, rising to 7.06% in 2025, double the 3.5% number in 2015.”
Market reaction
As of writing, the US Dollar Index was down 0.03% to trade at 106.08 on the day.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.