Public Information Notice No. 12/93

Public Information Notice: IMF Executive Board Concludes 2012 Article IV Consultation with the United States

August 2, 2012

On July 30, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the United States.¹

Background

The U.S. economy continues to grow at a tepid pace of around 2 percent, employment remains well below pre-crisis levels, and the housing market is stabilizing but remains depressed. Strong headwinds persist on private consumption, as households continue to deleverage amid weak—albeit stabilizing—house prices. Business fixed investment seems to have lost some momentum recently, despite the extraordinarily low borrowing costs and relatively favorable financial conditions facing the corporate sector. Residential construction has been improving, but from very low levels. Exports decelerated throughout the last year, in line with generally slower growth in foreign demand. The U.S. current account deficit has remained broadly stable. Overall, the slow pace of the recovery is consistent with past international experience in the aftermath of housing and financial crises.

Monetary policy remains highly accommodative, and the Federal Reserve responded to weaker-than-expected growth over the past year with a number of easing actions. Fiscal policy has begun weighing on growth, as the budget deficit is being gradually reduced. Continued progress has been made on implementation of the financial reform program, in line with the Dodd-Frank Act as well as the international regulatory reform agenda.

Growth is likely to remain moderate in 2012 and 2013, constrained by household deleveraging, fiscal restraint, and subpar global demand. Following a robust rebound after the recession, private investment in equipment and software is projected to expand at a slower pace, though it will remain a strong contributor to growth. After six consecutive years of declines, residential investment is projected to start making positive contributions to growth. A stronger dollar and weaker global demand are projected to weigh on exports. Headline and core inflation are projected to remain subdued, reaching the Federal Reserve’s 2 percent goal over the medium term. Downside risks around the outlook have intensified, including from the worsening of the euro area debt crisis as well as the uncertainty over domestic fiscal plans. On the financial sector front, the outlook for the U.S. banking system is broadly positive but subject to risks from an intensification of stresses in global financial markets.

With regard to policy actions, the Federal Reserve has indicated that economic conditions are likely to warrant exceptionally low levels of the federal funds rate at least through late 2014, and unveiled plans to further extend the average maturity of its securities holdings. The authorities recently enacted measures to ease mortgage modifications and refinancing. Last summer, Congress legislated budgetary savings worth about $2.1 trillion over the next decade, but negotiations regarding additional measures to reduce deficits over the medium term have been unsuccessful so far. The fiscal outlook for next year is extraordinarily uncertain given the large number of expiring tax provisions and scheduled automatic spending cuts.

Executive Board Assessment

Executive Directors welcomed the continuing moderate economic recovery in the United States, while noting the downside risks to the outlook stemming from external and domestic uncertainties. Directors called on U.S. policymakers to use effectively the limited policy space available to support the recovery in the near term and restore medium term fiscal sustainability with a balanced approach to consolidation. This will be important also to assist the global recovery, given the systemic importance of the United States.

Directors highlighted the need to adopt a measured pace of deficit reduction that does not sap the recovery. In particular, Directors agreed that removing the uncertainty created by the “fiscal cliff” in 2013 and promptly raising the debt ceiling are both critical. They stressed the importance of agreeing as early as possible on a comprehensive medium term fiscal consolidation plan, based on both higher revenues and lower entitlement spending, that would stabilize the debt ratio by mid decade and gradually reduce it afterwards.

Directors broadly agreed that monetary policy will need to remain highly accommodative for quite some time. Most Directors considered that there is room for further easing should the outlook deteriorate, although a number of Directors observed that the effectiveness of additional monetary easing could be limited in the prevailing very low interest rate environment. Some Directors highlighted the potential adverse global spillover effects of very low interest rates through capital flows and higher commodity prices. Directors also noted that, while the United States external current account deficit has declined, the external position remains weaker than justified by fundamentals and desired policies.

Directors welcomed the recent actions and proposals by the Administration to bolster the housing market, and urged their timely and aggressive implementation. Given the importance of the housing sector to the economic recovery, Directors concurred that further measures may be needed, including measures to facilitate the conversion of foreclosed houses into rental units, allowing mortgages to be modified in personal bankruptcy courts, and facilitating refinancing on a larger scale.

Directors welcomed the slowly improving conditions in the labor market. They noted that persistently high long term unemployment creates the risks of human capital losses and reduced attachment to the labor force. They concurred that training and job-search support should be adequately funded, and temporary tax incentives should be implemented to help reduce long term unemployment.

Directors commended the authorities for the significant progress achieved over the past year in implementing domestic and international financial reforms. They emphasized the need to increase the resilience of the U.S. financial system, including by strengthening the regulation of money market mutual funds, finalizing the Volcker Rule with due consideration of its cross border implications, accelerating the adoption of Basel III capital rules, and winding down the role of government-sponsored entities. They encouraged the authorities to strengthen coordination of financial sector regulation and supervision, and to allocate appropriate resources to regulatory and supervisory agencies.

Directors stressed the importance of a multilateral approach to economic policy management in the United States, and commended the United States for its active engagement in fostering international coordination on financial regulatory reforms. They underscored that the United States can make important contributions to global growth and stability by adopting a credible medium term plan for fiscal consolidation at a pace that does not undermine the recovery, as well as by further strengthening its financial sector. Directors welcomed the authorities’ continued commitment to secure the success of multilateral trade negotiations.

¹ Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.