Transcript

Transcript of a Press Conference on the Conclusion of the Article IV Consultation Mission with the United States

June 10, 2015

Christine Lagarde, IMF Managing Director
Alejandro Werner, Director of the Western Hemisphere Department
Nigel Chalk, U.S. Mission Chief
Aditya Narain, Assistant Director of the Monetary and Capital Markets Department
Gerry Rice, Director, Communications Department

Webcast of the press conference

MR. RICE: Good morning, everyone, and thank you for coming to this press conference on behalf of the International Monetary Fund. Today the topic is the United States 2015 Article IV consultation as well as the financial sector assessment program. And the press conference is on both topics.

I am very pleased to introduce to you this morning the Managing Director of the IMF, Madam Christine Lagarde. Immediately to her left is our Director for the Western Hemisphere Department, Alejandro Werner. To Madam Lagarde's right is the Mission Chief for the United States, Nigel Chalk and immediately to Nigel's right is Aditya Narain who is with our MCM Department and who has been intimately involved in the financial sector assessment.

We are on the record this morning. You know the topic and I would ask the Managing Director to make a few introductory remarks and then, we will be taking your questions. Thank you.

MS. LAGARDE: Well, thank you very much and welcome to you all for this briefing on the United States. By now, I suppose you will have seen our concluding statement and I will briefly summarize our findings and then, take your questions.

But first of all, let me note that this year, we have focused a lot of the findings on the financial sector assessment. You know, that we do a financial sector assessment every five years for an economy like the United States and all systemically important countries. It's a comprehensive exercise and the overall report of what we call the FSAP will be published on the 8th of July.

So the concluding statement includes some of the key findings but all the details, the work, the underlying assumption, the policy recommendations in the full extent -- to their full extent will be found in that paper which is due to be published on July the 7th. And that I highly recommend to you.

We have also, obviously, commented upon the status of the dollar as a currency and we have also commented quite extensively on the timing of the interest rate hike expected at some stage in the future. And I'll come back to that later. But before we get to policies let me say a few words about how we see the U.S. economic outlook.

Again, we meet against the background of a shaky, first quarter of the U.S. economy. And you will have seen that we have revised our growth forecast down to two point five percent in 2015. This is largely due to those factors that affected the first quarter. But this is not our main message because we believe that this is conjunctural and does not actually indicate substantive material trends in the U.S. economy.

Our main point is that we still believe that the underpinnings for a continued expansion are in place. The labor market has steadily improved over the last year. Job growth has averaged 260,000 per month and financial conditions remain very accommodative. Moreover, we expect cheaper oil prices to continue taking boosting growth while at the same time taking a bite out of the oil-related investment as we saw in the first quarter.

As always, there are risks and uncertainties to this outlook. For example, further delay of the housing recovery and the strong dollar could be a drag on future growth. Nevertheless, when we look at the whole picture, we believe that growth in the coming quarters will be at an annualized rate of three percent or even higher.

We see inflation pressures as muted, long-term unemployment and high levels of part-time work both point to remaining employment slack. Wage indicators on the whole have shown only tepid growth and when combined with dollar appreciation and cheaper energy costs, we expect inflation to start rising later in the year but only slowly reaching the Federal Reserve's two percent medium term objective by mid-2017.

So over the medium term, as we highlighted last year, there is still much work to be done. Our forecast of potential growth is now around two percent, far away from the three percent average growth rate that we saw before the Great Recession. Given this outlook, I would highlight our policy recommendations in three areas and I would start, of course, with monetary policy.

As we have noted before, the Fed's first rate increase in almost nine years has been carefully prepared and telegraphed. Nonetheless, regardless of the timing, higher U.S. policy rates could still result in significant market volatility with financial stability consequences that go well beyond the U.S. borders.

In weighing these risks, we think that there is a case for waiting to raise rates until there are more tangible signs of wage or price inflation that are currently evident. So in other words, we believe that a rate hike would be better off in early 2016.

Even after this first rate increase, a gradual rise in the federal fund's rates will likely be appropriate. Such a path may create a modest rise of inflation above the Fed's medium-term goal, perhaps up towards two-and-a-half percent. And we believe that that would be manageable. However, pursuing a cautious and gradual approach to interest rate normalization would provide valuable insurance against the risk of disinflation and needing to cut rates back to zero.

In the coming months, continued clear and effective communication by the Fed will be more important than ever. Last year, we made some recommendations on the communication toolkit such as scheduling press conferences after each FOMC meeting and publishing a quarterly monetary report. We recognize the difficulties with adding more communication but we continue to believe that it merits consideration.

Turning to financial stability, our team has taken a detailed and comprehensive look at the health of the financial sector and our financial stability assessment program. Much has been done over the past several years to strengthen the U.S. financial system. It will be important to ensure that that progress including the legislative advances under the Dodd-Frank Act is not rolled back.

Diluting the important progress made would clearly be undesirable. It also seems clear that risks have built up during the long period of exceptionally low interest rates. Nevertheless, today the data point towards a system with pockets of vulnerabilities, so pockets of vulnerabilities rather than with broad-based excesses across the whole sector.

But those pockets of vulnerabilities should not be minimized. They could create serious macro-relevant sources of financial instability both here and abroad. Some of our concerns the migration of intermediation to so-called shadow banks or non-bank financial institutions and the potential for insufficient liquidity in a range of fixed-income markets particularly as these markets come under stress.

I know that U.S. authorities are investing heavily in understanding and assessing these issues. Some key policy recommendations to reduce financial stability risks that I would highlight include, first of all, giving all members of the Financial Stability Oversight Committee, the FSOC, an explicit financial stability mandate so as to further strengthen the effectiveness of the FSOC.

Second, undertaking a concerted effort to provide the FSOC and the Office of Financial Research with all the data they need to build a comprehensive view and analysis of systemic risk.

Third, updating the regulatory regime in the insurance sector to create an independent and well-resourced body that has a nationwide remit.

There are further details in the concluding statement and, as I have said, it is explained in great details in the document that will be released on July the 7th. Let me now turn to fiscal policies.

We've said that before given our forecast of a steady rise in public debt to GDP ratio it remains critically important to adopt and implement a credible, medium-term fiscal plan. This requires action on tax reform, Social Security reform and steps to contain healthcare costs.

If these fiscal challenges, the medium-term challenges that I'm referring to, were tackled, it would provide scope to expand the near-term budget envelope for measures to support future growth, job creation and productivity. And here I would prioritize infrastructure spending, better education spending and policies that raise labor force participation including steps like subsidized childcare facilities.

So in conclusion, we believe that near-term U.S. growth prospects are good notwithstanding the very bad first quarter that we saw yet again. Muted inflation pressures suggest that interest rate hike can wait a little and that such interest rate hike would be better off in 2016. Even after this initial step is taken, we believe that a gradual rise in the federal fund's rate will likely be appropriate.

And although, we recognize that very important progress has been made to strengthen the U.S. financial system, there is more to be done to address the pockets of vulnerabilities that I have just mentioned. So with that, I'm very happy to take your questions preferably on the U.S. economy. Thank you.

MR. RICE: Thank you, Madam Lagarde. And if you could keep your questions as brief as possible, we'll try and take as many as possible. Yes, sir?

QUESTIONER: Ian Talley, Wall Street Journal. I assume you have spoken with your friend, Janet about your proposed plan. I'm wondering whether this will solidify your friendship or cause -- does she agree? And secondly, I cannot help but ask about the topic du jour, Greece. Can a bailout of Greece really credibly go forward without any sort of serious debt relief and should that be part of the current proposal?

MS. LAGARDE: Thank you. You know, we essentially agree with the President of the Fed in that the interest rate hike must be data dependent and based on sound and as detailed and granular data analysis as is possible which is clearly the line that has been articulated by Chairman Yellen over and over.

So we totally agree with that. What we are seeing in the data that the team has analyzed, is analyzing, is that the inflation rate is not progressing at a rate that would warrant, without risk (and I can come back to that in a second) a rate hike in the next few months which is why to make the point we are saying that the economy would be better off with a rate hike in early 2016 when hopefully, the inflation data and numbers will have consolidated.

And even if it is to a risk of a slight over-inflation relative to the two percent rate that is mandated under the Fed's rules. Because we believe that the tradeoff between starting too early and risking disinflation and having to return to a lower rate is higher than the risk of slightly above two percent inflation going forward. That's the position.

On Greece: First of all, we certainly welcome the constructive meeting which has taken place yesterday between the Greek Prime Minister and the President of the European Commission and the President of the Euro Group. It clearly opens a window of time during which we can hear in details from the authorities, their response, their comments, their views on the joint proposal that was proposed to them yesterday.

That joint proposal agreed between the European Commission, the IMF and the European Central Bank as clearly demonstrated significant flexibility on the part of the institutions relative to the previous program in order to take into account the political situation and the social situation in order to mitigate and soften the consequences of the necessary measures that have to be taken to allow Greece to return to stability and to a sustainable growth and economy.

So we welcome all that and the flexibility that I have just mentioned touches on all sorts of issues including the labor market, including the pace of fiscal consolidation, including the timeframe over which that fiscal consolidation takes place. And it's really very much intended to ease the adjustment and to facilitate this implementation for the people of Greece.

So we look forward to the position of the Greek authorities and we stand ready to do technical work, look at potential alternatives in order to reach the targets that have been set. As long as all that is consistent with likely solid implementation. And I would totally endorse the three points made by President Draghi yesterday which is that that recovery process must be conducive to growth, to economic and financial sustainability, as well as to social acceptability in the country.

MR. RICE: Thank you. Yes, the lady in the second row.

QUESTIONER: Thank you, Gerry, Madam Lagarde. So I want to ask a little bit more about the international context given the recent weakness from the global economy. So what impact does the IMF see of the weaker demand from Japan and Europe and also slowing Chinese economy on the U.S. economic recovery. So how much of a role does that factors play in slowing maybe the progress of Fed's normalization of the monetary policy?

And also, does the -- because there's a Federal Reserve, officials said yesterday were -- sorry, one day before that the Federal Reserve might place a little bit too much importance on the boost from the falling oil prices on consumption. So does the IMF share the same view? Thank you.

MS. LAGARDE: You know what? Given that your question is so heavily technical, I'm going to turn to the Mission Chief of the U.S. team so he can take you through the details of the assessment of the various parameters into the CPE so that you have a fully technical information response.

MR. CHALK: Okay, so certainly the slower growth in the global economy is weighing on the U.S. It's very hard right now to disentangle that from the effects of the stronger dollar and the effects of the West Coast port strike on the trade data. I think we were quite encouraged that the trade data released yesterday was relatively positive but it's just one data point. And I think we are likely to see some weight, some headwind on the U.S. economy from both weaker growth in the global economy and the trading partners and also from a stronger dollar.

So it is a factor. It's feeding into our forecasts. I can't tell you exactly how much of our change in forecast is due to that because we -- there's obviously been a lot of moves in oil, in the currency, in global growth so we don’t split it out. In terms of the boost to oil prices, I think we have been somewhat disappointed by the increase in household consumption that we had expected from a lower oil price.

That's still a puzzle. I think that's a puzzle we discussed with our counterparts in the U.S. Government. That's also a puzzle for them. And then, at the same time, the decline in oil sector investment has been much stronger and much faster than I think we had anticipated a few months ago.

So oil is definitely having a big effect on the U.S. We're expecting in the latter part of this year, remainder of this year, that we will start to see more consumption effects from oil, from lower oil prices, but it's definitely a risk to the U.S. economy if that oil windfall is saved then we will see lower growth than we're currently expecting. Thank you.

MR. RICE: Yes, sir. In the second row.

QUESTIONER: Hi, Madam Lagarde. I also have a double barrel question, one on U.S. and one on Greece. First of all, in the U.S., in your report you note that the U.S. dollar is, I believe, moderately overvalued. What is your expectation over the coming months of where the U.S. dollar will head? Do you anticipate it remaining overvalued? Do you anticipate it returning to equilibrium in some kind of way?

And secondly, in Greece, in the nearer term, how confident are you that Greece will make its scheduled payment to the IMF tomorrow?

MS. LAGARDE: On your question about the U.S. dollar and its positioning, we do conclude that the U.S. dollar is moderately overvalued which is a change compared with our previous assessment. And that is clearly as a result of the constant appreciation of the U.S. dollar by about 13 percent over the last 12 months relative to other currencies.

Continued over appreciation is a potential risk and should not be discounted. But we do not believe that it has so far affected negatively the growth of the U.S. economy considering the oil price decline which has been a bit of a tradeoff to that circumstance of appreciation of the dollar.

Incidentally, not that it matters so much but it matters for the overall economy, this movement has also benefitted economies that were suffering of very low inflation and currencies that have taken the benefit of under appreciation which, hopefully, would facilitate their growth and therefore, would be good for the global economy. And I'm thinking here, particularly, of the Euro Zone and counties like Japan.

On the issue of the repayment, I can only listen to what the membership tells us. Greece is a member of the institution and had indicated including as late as night from the Prime Minister himself that payment had been honored and would be honored. I think his words were do not worry. So I'm confident that that will continue to be the case.

MR. RICE: Okay, swinging back around, gentleman in the front row.

QUESTIONER: Just following up on Greece a little bit, has there been a discussion about bundling this month's payments? Have you had any discussion with the Greek authorities about that? Has there been a request from Greek authorities? And secondly, just back to the issue of debt relief, do you think that debt relief is needed in order to have a sustainable or a practical bailout or a working bailout?

MS. LAGARDE: You know, on your first point, it is not a matter that we actually discuss publicly when a member state requests a particular set of conditions. I'm not aware of such thing but it's not something that we debate and discuss.

And asked about payment on Friday, the Prime Minister said do not worry. So, you know, au contraire, you can deduct easily that the unbundling is not in the cards.

Second, you know, I don't want to isolate one component because everything, as been mentioned by us at the IMF, everything has to add up at the end of the day which is why we, as far as we're concerned, we have demonstrated flexibility and we continue to be flexible in assessing the measures that contribute to the fiscal targets that have been proposed.

But clearly, if there was to be slippages from those targets, for the whole program to add up, then financing has to be considered. And financing is a factor of the level of the debt which, itself, is a factor of the maturity and interest rates at which debt has been accumulating.

MR. RICE: Thank you. Yes, the lady in the second row? Yes, ma'am?

QUESTIONER: Thank you. Recently, our stream of data have shown that personal consumption has shown signs of weakening in the U.S. As we see the lower oil prices have failed to -- so far has failed to translate into bigger purchasing powers and people are talking about the financial crisis have left some lasting imprint on U.S. consumer behavior.

So I would like to know from your point of view, do you expect weakening consumer consumption will become a long-term trend in the future and how should we consider growing the U.S. economy if the U.S. consumers tend to spend less? Thank you.

MS. LAGARDE: I would like to commend you on the analysis of the situation. It's exactly what we conclude as well but I don't know whether we draw sort of medium to long-term consequences from that short-term analysis as to what will be the behavior of consumers going forward.

Nigel, do you want to address that?

MR. CHALK: I think certainly you've seen big structural changes in household behavior in the U.S. since the crisis. You know have a demographic that's aging. You have a young population that has a high level of student debt. You have low rates of household formations so people aren't building wealth as they used to do by owning houses. I think all of these things are going to feed into long-term consumption behavior. And certainly, I don't think we believe we're going to go back to the kind of consumption and saving behavior we saw pre-crisis which clearly proved to be unsustainable.

However, I think what we've seen in previous periods when we've had oil price declines is that the initial impact is that saving will go up and the people wait to see, one, if those oil gains are permanent or temporary. And, two, they want to actually see it affect their sort of daily household income, credit card bills and then, they adjust their consumption behavior.

So we should expect consumption behavior to adjust later this year. We should expect saving rates to come down but certainly, they're not going to go back to what the level of consumption was pre-financial crisis.

MR. RICE: Thank you. I do see a number of colleagues from the Greek Press so I'm going to call upon one colleague from the Greek Press.

QUESTIONER: Thank you for that. We do have a question on Greece and one on the U.S. economy. So on the U.S. economy, how much do you consider the external factors of risks like Greek default or Greek exit influencing the U.S. economy and in specifically the financial sector given that you analyze the financial sector extensively in this review? And are you in contact, Madam Lagarde, with the U.S. Secretary of the Treasury, Jack Lew, about Greece? Has he conveyed a message to you about how he views -- has he conveyed any message to you about how he views the situation? Are you in contact with the Secretary of the Treasury on Greece? Thank you.

MS. LAGARDE: Okay, on the impact of the Greek crisis on the U.S. economy, we don't believe that it is a significant risk. But having said that, there is so much uncertainty around this risk realization and the extent to which it would affect nationally, regionally, internationally the financial markets.

I sort of phrase that risk assessment with a strong caveat. However, given the various tools available to the Europeans, we don't grade that risk on the U.S. economy as very high.

I'm in contact with many treasury secretaries around the world including, obviously, the U.S. Treasury Secretary, Jack Lew. We had a very good session yesterday on the Article IV on the U.S. economy and we talk about international stability around the world which includes, of course, a discussion on the current proposals and discussions taking place between the institutions and the country.

MR. RICE: Thank you. Looking for other questions? Yes, sir, just -- yes.

QUESTIONER: Thank you very much. Madam Lagarde, when you spoke at the Atlantic Council when you talked about the United States you again underscored your disappointment with Congress not acting on the rules change that you want for the governance of the IMF. And you said, you continue to speak to members of Congress in this country.

Could you give us an update on that and do you have anything different or positive to report on your dealings with the lawmakers?

MS. LAGARDE: I think the IMF membership continues to be disappointed with the five-years' delay in implementing the governance reform that was actually decided back in 2010 and largely advocated by the United States of America where the only critical step lagging or missing, rather, is ratification by the U.S. Congress of such ratification.

I continue to have discussions with various members of Congress on that particular matter. I very much hope that this ratification will take place in due course. I think that in many instances we have demonstrated our ability to mobilize resources, to provide technical assistance, to give support as was the case, for instance, in the three Ebola-stricken countries recently, as was the case in relation to Ukraine recently as well, as is the case with Nepal where I think the IMF is going to be one of the first institutions to consider some disbursement for that country affected by natural disaster.

So I very much hope that by demonstrating day-after-day, country-after-country, program-after-program that we actually produce public good helpful for the economy of the United States Congress members will be convinced that it is worth a ratification.

MR. RICE: Thank you. This is going to be the last question. All right, sir, you have it. It's going to be Greece.

QUESTIONER: Ms. Lagarde, I have to admit that I always listen to you with greater attention and I really need to know your answer on this. For the last five years I ask the same question, if Greece can make it. You answer it many times but five years I think is too long of a time and I wanted to know what went wrong and who is responsible for this human disaster in Greece?

MS. LAGARDE: You know, my hope is that by combining all the reforms and not just fiscal consolidation based on a narrow base of people who suffer a much higher burden than on the more equal basis, by enforcing the structural reforms, by really embracing all the objectives of the program, the country can pull itself out of a situation that has lasted for too long. And we are available to help in that process. We have demonstrated flexibility but it's also a question of putting the economy on a sustainable path where jobs will be created, where the unemployment rate will go down and where ultimately the country will be able to finance itself using normal investors and not necessarily the IMF and other institutions.

MR. RICE: Thank you very much and thank you all for coming today.