IMF Head Says Economy Slowing, Praises QE3

The IMF head says that Europe and the U.S. pose the greatest threats to global growth.

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A top official says new International Monetary Fund estimates coming next month may show a global economy moving even more slowly than had previously been estimated.

"The global growth that we had forecasted 12 months ago, that we had revisited six months ago, is likely to be a little bit weaker than we had anticipated," said IMF Managing Director Christine Lagarde at the Peterson Institute for International Economics in Washington. That downward revision is likely to involve "small decimal points for sure," she added, "but what's characteristic is that our forecast has trended downward."

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Lagarde said the IMF will announce its final growth forecast numbers at an October meeting with the World Bank in Tokyo. In July, the fund cut its forecast for global growth in 2013 from April's 4.1 percent estimate to 3.9 percent, but kept its 2012 forecast steady at 3.5 percent. Chief among the threats to the global economy is the European financial crisis, said Lagarde, though she added that the U.S. poses "another major risk" with the looming spending cuts and tax hikes set to hit the budget at year's end.

Lagarde acknowledged that cutting U.S. government spending is ultimately positive, but she cautioned that it should be done over the medium-term, since cuts made too quickly could bring U.S. growth to a standstill.

The Congressional Budget Office agreed, saying in an August report that if the so-called fiscal cliff isn't avoided, the nation's GDP could go into negative territory in 2013.

Those effects go beyond America's borders, Lagarde also warned.

The fiscal cliff is "not a threat just for the United States of America; it's a threat for the global economy, given the size of the U.S. economy and its linkages with many other countries around the globe," she said.

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Lagarde praised some central banks for stimulating national economies with loose monetary policy.

This month the U.S. Federal Reserve announced that it would undertake a third round of massive asset buys known as "quantitative easing," or QE3, where the Fed would buy $40 billion in mortgage-backed securities each month until employment improves "substantially."

Some inflation hawks have questioned the wisdom of QE3, worrying that the accommodative policy could raise price levels. At the same time, some have wondered whether massive bond buys could affect global exchange rates and hurt emerging economies.

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But Lagarde believes that the policies could, in time, prove themselves to be the correct ones.

"It may well be that central banks ... will be recognized to have played a significant role in pulling the global economy out of this great recession," she said.

Danielle Kurtzleben is a business and economics reporter for U.S. News & World Report. Connect with her on Twitter at @titonka or via E-mail at dkurtzleben@usnews.com.