Lagarde: US must deal with ‘looming’ danger of fiscal cliff

Christine Lagarde, the managing director of the International Monetary Fund (IMF), described the United States' struggles to deal with the "fiscal cliff," as well as a pending battle over raising the debt limit, as "looming threats" facing the global economy.

Speaking in Washington, Lagarde joined the growing chorus of domestic and international officials urging policymakers to overcome politics and find some way to avert the automatic spending cuts and expiring tax cuts set to take effect at the beginning of next year. 

Lagarde warned that a failure to change course could erase any economic growth next year for the U.S., which in turn would weigh on a global economy grappling with other challenges in Europe and in emerging nations.

"We all recognize that political calendars impact the timing of key decisions. This is true everywhere. But the current uncertainty presents a serious threat for the United States and, as the world’s largest economy, for the global economy," she said in prepared remarks at the Peterson Institute for International Economics. "We all hope that political clarity emerges soon, and with it, actions to avoid the fiscal cliff."

Lagarde added that the U.S. must still address its growing debt and deficit over the medium term, but not in so dramatic a fashion that it endangers the still fragile U.S. recovery, which she described as "tepid."

Given the challenges facing the U.S. and Europe, Lagarde said that the IMF will likely trim its economic growth expectations for the world when it meets in a few weeks.

"We continue to project a gradual recovery, but global growth will likely be a bit weaker than we had anticipated even in July, and our forecast has trended downward over the last 12 months," she said.

Beyond struggles in the globe's established economies, Lagarde also cited slowdowns in the world's emerging economies as a point of concern, as well as the recent outbreak of unrest across the Middle East. She emphasized the need for the global community to help many nations transition peacefully during government changes in places like Libya and Egypt.

"The world has a huge stake in the successful transformation of the Middle East — and all of us, including the IMF, must play our part," she said.

Despite those gloomier points, Lagarde heaped praise on the nation's central banks, including the Federal Reserve, for taking bold steps to alter the trajectory of the global economy. 

Even as Republicans blast the Fed's recent decision to inject further stimulus into the economy from Congress and the campaign trail, Lagarde made clear she supported the move, calling it one of many "right decisions" recently made by the globe's major central banks that serve as "big policy signals in the right direction."

In fact, Lagarde suggested that when history of the emergence from the global recession is written, central banks like the Fed may play a starring role.

"Just as the central banks were misguided during the Great Depression and accelerated that crisis, it may well be that central banks will have played a significant role in pulling the global economy out of this great recession," she said.

Earlier this month, the Fed announced it was beginning a third round of "quantitative easing," committing to buy $40 billion of mortgage bonds per month in an effort to lower borrowing costs and spur further economic activity. Furthermore, the Fed left this new stimulus open-ended, rather than setting a ceiling for the purchases. The central bank said it would continue until it was satisfied with growth in the nation's labor market.

Republicans have been critical of the Fed's expansive policy since the economic downturn, arguing it puts the nation at risk for inflation and enables the government to keep borrowing at historically low levels.

---