IMF Executive Board Concludes 2021 Article IV Consultation with the United States

July 22, 2021

Washington, DC: On July 19, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with the United States.

The United States (U.S.) has been hit hard by the pandemic, which has tragically resulted in close to 600,000 deaths. Thanks to mask mandates, social distancing, shut down orders and over half the eligible population being fully vaccinated, new cases of COVID-19 and the test positivity rate have both fallen significantly in 2021. The receding case numbers should allow normal activities to resume and provide a substantial economic boost. The US economy is expected to grow by around 7 percent in 2021, as savings are drawn down, demand shifts back to in-person services, and depleted inventories are rebuilt. Disruptive supply and demand mismatches are possible as the economy normalizes, including in the labor market, but these are expected to be transitory, while the significant employment gap should help contain wage and price pressures.

The recovery is being underpinned by strong fiscal and monetary support. The American Rescue Plan was adopted in March 2021 and contained 8.2 percent of GDP in federal spending, in addition to the December fiscal package. Fiscal support to small businesses was extended, as was expanded unemployment insurance, while households received transfers via stimulus checks. These packages have supported demand, helped avoid corporate bankruptcies, and relieved financial stress on households and state and local governments. The Federal Reserve’s commitment to allow inflation to overshoot the 2 percent target in the near term has facilitated accommodative monetary policy in an environment of low neutral rates, with clear forward guidance on the path of policy rates, based on actual inflation outcomes and inflation expectations.

The new Administration has proposed an ambitious agenda to address long-standing structural challenges in the US economy. The American Jobs Plan and American Families Plan contain proposals to redistribute resources toward vulnerable households, invest in infrastructure, incentivize human capital accumulation and labor force participation, and improve productivity. A renewed effort is underway to lower carbon emissions and increase resilience to climate change. The Administration has also proposed to offset part of the fiscal cost of its plans by increasing taxes collected from corporations and high income households. Proposed tax reforms include a higher statutory rate of corporate tax, a global minimum tax, as well as increases in the top marginal rate of personal income tax and the rate high income earners pay on capital gains. On a net basis, the Administration’s fiscal plans would leave federal government debt 3¼ percent of GDP higher at end-2030.

Executive Board Assessment [2]

Executive Directors agreed with the thrust of the staff appraisal. They welcomed recent efforts to bring the pandemic under control in the U.S., and noted that the major reduction in COVID-19 cases has combined with strong policy support to put the U.S. economy on a strong footing while generating positive outward spillovers to the rest of the world. Directors cautioned that this progress has come at a cost, significantly increasing the level of public debt and widening the current account deficit. Corporate and nonbank leverage have increased with rising asset valuations. Directors noted that the pandemic had weighed heavily on low income households. Moreover, the outlook remains subject to the evolution of the pandemic and the adoption in Congress of the fiscal measures proposed by the administration.

Directors welcomed proposals by the new U.S. administration to address structural challenges by redistributing resources toward vulnerable households, investing in infrastructure, incentivizing human capital accumulation, boosting labor force participation, and improving productivity. Directors also commended the renewed effort to reduce carbon emissions and increase resilience to climate change. Directors welcomed proposals to help offset the cost of these spending plans by increasing taxes on corporates and high-income households, closing tax loopholes and remaking the international corporate tax system, while increasing resources for the Internal Revenue Service. Directors noted that a better targeting of policies would strengthen their impact on macroeconomic and distributional outcomes, help trigger a bigger boost to aggregate supply, and lessen the risk of a sustained rise in inflation.

Directors observed that the actions of the Federal Reserve have been highly effective at managing the crisis and supporting recovery. The new monetary policy framework rightly commits to a near-term overshooting of the two-percent inflation target. This has facilitated a more rapid recovery and provided forward guidance on how the Federal Reserve will pursue its mandate of stable inflation and full employment. Directors welcomed the Federal Reserve’s commitment to communicate well in advance its thinking so that the eventual withdrawal of asset purchases and monetary accommodation is orderly and transparent.

Directors stressed that policy adjustments are necessary to lower the fiscal deficit and put public debt on a gradual downward path over the medium term. They recommended that the authorities consider raising revenues, including through a carbon tax, higher taxation of fuels, and a broad-based federal consumption tax, as well as lessening the impact of an aging demographic on future spending.

Directors observed that systemic financial stability risks appear close to the historical average. However, the pandemic has revealed important shortcomings in the functioning-under-stress of systemically important U.S. markets and institutions. Directors urged that serious consideration be given to structural changes in the operation of the Treasury market, key money markets, and prime money market funds.

Directors noted that the U.S. current account deficit has increased during the pandemic, and the external position is weaker than implied by medium-term fundamentals and desirable policies. They urged the authorities to roll back trade restrictions and tariff increases. They also urged that currency-related trade responses be avoided. Directors encouraged the U.S. to work constructively with its trading partners to strengthen the rules-based multilateral trading system.

It is expected that the next Article IV consultation with the United States will be held on the standard 12-month cycle.