Efforts by the Federal Reserve to cool off an overheating economy appear not to have done the job so far, prompting the head of the International Monetary Fund on Saturday to urge further action in order to get inflation back down to sustainable levels.

Despite all the recent attention around generative A.I. eliminating jobs, the spending on more productive IT systems that semiconductor company Nvidia flagged hasn’t yet triggered a surge in unemployment that might worry the Fed. Nor has bank lending data seen any sign of a marked deterioration, either. 

“The Fed will have to stay the course, and perhaps, in our view, they may need to do a little bit more,” IMF managing director Kristalina Georgieva told CNBC on Saturday.

Capital markets had hoped Fed Chair Jay Powell was done with his hiking cycle, which is barely more than a year old now. Following the March collapse of Silicon Valley Bank, investors had actually begun taking bets on how soon and how fast the Fed would have to ease policy once again. 

Interest rates in the United States haven’t been this high since mid-September 2007, when the Fed cut rates by half a point to 4.75% as the subprime crisis began to spill over into the broader economy. 

Should the Fed follow Georgieva’s advice and tighten a further half point to 5.5%, policy would hit levels not seen since the dotcom era.

Despite having one of the highest interest rates this side of the millennium, real rates—i.e., once lending costs are adjusted for inflation—are not yet restrictive. That’s because consumer price gains are running at a similar 5% clip, according to official government figures. 

That may explain why there is little hard evidence in recent economic data that activity is starting to show distinct signs of sluggishness. On Friday, for example, markets were surprised by red-hot May payrolls data that helped lift the tech-heavy Nasdaq past August 2022 peaks to a fresh 52-week high.

The rising cost of borrowing does however present potential problems given the nominal value of debt currently outstanding. 

Last month, the New York branch of the Federal Reserve revealed U.S. household debt breached the $17 trillion mark in the first quarter of this year. Close to three-quarters of that consists of mortgage liabilities, which are underpinned by housing and real estate assets on the other side of that balance sheet. But credit card debt, for example, has now reached a record level just shy of $1 trillion. 

For now, however, all signs point to U.S. growth simply slowing down, with the IMF forecasting economic output to expand by 1.6% in 2023 versus 2.1% last year.

“We don’t yet see a significant slowdown in lending,” Georgieva told CNBC. “There is some, but not on the scale that would lead to the Fed stepping back.”