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Lagarde: U.S. Economy Not in a 'Downward Spiral'

Christine Lagarde, International Monetary Fund Managing Director, spoke with Bloomberg Television's Tom Keene today about the IMF's forecast cut for U.S. GDP growth in 2014, how she views the U.S. economy on a global scale and French politics. She also explains why the IMF recommends an increase in the U.S. minimum wage to kick start growth.

Lagarde said, "We have revised downward the 2014 numbers, but we do not think that it will be a downward spiral. We believe that 2015 will be up 3 percent."

According to Lagarde, the U.S is still the locomotive of the global economy, "because it's one of those very large advanced economies and the largest economy in the world to this day. We also believe that some of the emerging markets are going to slow down as China has begun doing going forward."

Highlights include:

  • Imf Doesn't See Downward Spiral In U.S. Economy
  • U.S. Is Still A Locomotive Of Global Economy
  • Emerging Markets To Slow Down As China Is Doing
  • Imf Sees Subdued Inflation Around World Economy
  • Imf Trying To Be Even-Handed On Forecasts
  • Inflation Over Fed Target Temporarily Would Be Okay

Video links:

Full Interview: IMF's Lagarde: U.S. Still Engine for Global Growth

Courtesy of Bloomberg Television


Video Segment: Lagarde: U.S. Economy Is Not in a Downward Spiral

Courtesy of Bloomberg Television


Video Segment: Lagarde: U.S. Should Increase the Minimum Wage

Courtesy of Bloomberg Television


Video Segment: Lagarde: Watching French Economics, Not Politics

Courtesy of Bloomberg Television


TOM KEENE: This is an important day, not like the spring meetings that we had a number of weeks ago but really the bombshell of what we heard in the IMF's report on a small country they look at, one of the many hundreds they look at, called the United States of America. So let's begin with the managing director.

I was sitting in your press conference where you talked about a more subdued growth, a more subdued inflation. And Madame Lagarde, all I could think of was la nouvelle neutral, the idea of working for Bill Gross (ph) and PIMCO, which is to say that your experts within this building have really grabbed onto the idea of a more subdued economy.

Do you agree with Bill Gross that it will be years of a subdued U.S.?

CHRISTINE LAGARDE: Tom, we have revised downward the 2014 numbers, but we do not think that it will be a downward spiral. We believe that 2015 will be up 3 percent. However, we have revised our growth trend on an ongoing basis from where it was on average in the last 50 years or so, 3 percent to 2 percent. And we have done that on the basis of the aging of population and on the basis of lower productivity based on latest trends. So yes, we have -- we have revised downwards --


LAGARDE: -- but it does not mean that we are downbeat for 2014.

KEENE: Your Olivier Blanchard (ph) walked by earlier and I thought of his work in global macroeconomics. This is a profound moment. You are suggesting a more subdued potential GDP for all of the nations.

Is the U.S. still the locomotive of the global economy?

LAGARDE: Yes, it is, because it's one of those very large advanced economies and the largest economy in the world to this day. We also believe that some of the emerging markets are going to slow down as China has begun doing going forward.

So at the moment, the advanced economies are still driving the show because of the high base they start from and the growth percentage that they display.

KEENE: It is -- the phrase "subdued inflation" I found remarkable. We had a very good economic report today in the U.S.

What is the probability that the IMF gets this wrong and we turn out to have better outcome?

LAGARDE: Forecasting is not a science. Let's begin with that.

Second, there is a lot of uncertainty about some of those key numbers.

KEENE: There is.

LAGARDE: There is uncertainty. Let's face it, whether you look at unemployment, whether you look at employment, whether you analyze the participation rate -- all of that is not rocket science, maybe, but it's not -- that's clearly explainable for some of those numbers.

When we look at inflation, there is also what we see at the moment, which is subdued inflation around the world, particularly in the advanced economies.

And yet, there has been movement lately upward rather than downward. So that is the reason why we are eventually coming out with a recommendation that the Fed be on the communication and as active as it could in order to explain the uncertainty.

And when the uncertainty settles and fades, that the Fed can actually explain very clearly what is happening so that markets at the other end do not operate on the basis of that sort of uncertainty plateau that they seem to enjoy.

KEENE: You spent years in high school in Washington and a long tenure in Chicago in the legal business.

Here we have the IMF speaking to America about the minimum wage and the Earned Income Tax Credit. This comes as Eric Cantor, Republicans reform; you're a great student of American politics.

Why can't an international organization talk labor economics to America?

Why are you lecturing America on the minimum wage?

LAGARDE: We look at numbers and when we see that there are 50 million Americans living below poverty level, when we see that many of those are actually working poor and when we see that quite a large number of them are single households generally held by women, we believe that it has macroeconomic dimension that requires our attention.

And we have to do something about it. So what do we recommendation? We recommend an increase of something that has been around for the last 40 years, which is the EITC, so that it puts a bit more money --


KEENE: -- on the minimum wage?

LAGARDE: That, together with an increase of the minimum wage, we believe would be very helpful to kickstart growth and give a little bit of demand support that would not be fueled by taxpayers' money.

KEENE: May I -- we've seen a Lagarde moment here, folks.

This is important -- you lecture India and with their wonderful and historic new change in government on what to do, is Lagarde telling the Ph.D.s here, we're not just going to lecture India; we're going to lecture the U.K. on housing and the United States on the minimum wage?

Is it an equal opportunity?


LAGARDE: Well, we have to be evenhanded and it's our job to say what we see, what we analyze and what we forecast. We don't always get it right. Let's face it.

But when we have checked and double-checked and when we believe that stability is at stake, then we make the recommendations. Then it's for political leaders, for policymakers to decide what they do with it and they can very well ignore it if they want to.

We hope it's not at their peril (ph).

KEENE: In economics, they talk about ambiguities. In your report, in the United States, on monetary policy, you talk about substantive ambiguities. It's a mouthful. I don't know what it is in French.

What is your mandate to Chair Yellen and the Federal Reserve?

LAGARDE: We very much approve what has been done in terms of monetary policy and we believe that she has communicated well the hollow of uncertainty that looms around the U.S. economy at the moment, particularly the employment and unemployment numbers.

We believe that the tapering that is happening is happening in this sort of transitory way, gradual way, well communicated way that we had recommended.

And we are quite confident that as employment numbers firm up and unemployment goes down, provided that inflation remains in check, she continues together with the board to conclude the tapering and gradually over time move into tightening.

And if inflation has to go temporarily up a little bit above the 2 percent target, we believe that --


KEENE: Let me pin you down on this.

What is your little bit of Olivier Blanchard with original research on this earlier in the crisis about a 4 percent target?

He was raked over the coals for that statement.

What is the little bit of inflation to Christine Lagarde?

LAGARDE: We're more thinking in terms of 2.5 percent for a temporary period of time --


KEENE: So the real very exclusive headline here folks is you're down to tenths of a percent --


KEENE: -- with the IMF. That's very dangerous.

Let me just finish up, change gears on a couple of topics.

There's been an uproar about Christine Lagarde and the European Commission in Brussels. And you've put that aside.

I don't have time for that. I had to find a place besides the United States with more fractious politics -- and that maybe is France. It is a jumble, what you must be observing in your France. There is a discussion of if this, then that; then this, then that, that you would possibly seek elective office in France.

I know you will tell me now and you have not thought about it and you're happy here.

But please comment for our global audience on how you perceive the jumble of French politics right now.

LAGARDE: We're looking at economic issues, not that political issues. And unfortunately, sometimes they intersect. And I would hope that the political issues would actually support the economic pickup in all countries including my own country.

You do that very nicely, very quickly. France, Switzerland on Friday, who do you think would win?

LAGARDE: Oh, dear. The best.

KEENE: The best. OK, spoken like an IMF managing director.


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