Washington DC, 17 July 2024
The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1] with the United States.
The U.S. economy has turned in a strong performance over the past few years. Hysteresis effects from the pandemic did not materialize and both activity and employment now exceed pre-pandemic expectations. Real incomes were diminished by the unexpected rise in inflation in 2022 but have now risen above pre-pandemic levels. Job growth has been particularly fast with 16 million new jobs created since end-2020. However, income and wealth gains have been uneven across the income distribution and poverty remains high, particularly following the expiration of pandemic-era support.
The ongoing disinflation has taken a relatively light toll on the economy. The Federal Reserve responded to record-high inflation by raising the policy rate by 525bps which bolstered policy credibility, provided an anchor for wages and prices, and helped guide inflation back toward the FOMC’s 2 percent goal. Wealth gains and limited refinancing needs have bolstered household and corporate balance sheets against the contractionary impact of higher interest rates. Monetary policy tightening was also supported by important supply-side gains, including an expansion of labor supply from immigrant inflows. PCE inflation was 2.7 percent in April (down from a peak of 7.1 percent in 2022) and is expected to return to 2 percent by mid-2025.
The general government fiscal deficit and debt, as a share of GDP, are both projected to remain well above pre-pandemic forecasts over the medium-term. Specifically, under current policies, the general government debt is expected to rise steadily and exceed 140 percent of GDP by 2032. Similarly, the general government deficit is expected to remain around 2½ percent of GDP above the levels forecast at the time of the 2019 Article IV consultation.
Several steps have been taken to strengthen the functioning of the Treasury market and to better insulate money market funds from liquidity shortfalls. The pace of shrinking of the Federal Reserve’s balance sheet has begun to taper. However, concrete actions have been lacking in mitigating the banking system vulnerabilities that came to light in 2023.
Executive Board Assessment[2]
Executive Directors welcomed the remarkable performance of the U.S. economy over the past few years and noted that the ongoing disinflation process, aided by higher productivity growth and expanded labor supply, including through immigration, has taken a relatively light toll on economic activity. While the outlook remains positive, Directors emphasized that upside risks to inflation need to be monitored and determined actions will be necessary to address fiscal imbalances, financial vulnerabilities, as well as the increased inequality and poverty, which has risen back to pre‑pandemic levels.
Directors commended the authorities for their commitment to price stability and successful disinflation. Nevertheless, given salient upside risks to inflation and strong performance of the economy, they noted that the Federal Reserve should not reduce its policy rate until there is clearer evidence that inflation is sustainably returning to its 2 percent target. Clear communication, including forward guidance, will help guide market expectations in line with the Fed’s intended policy path.
Directors noted that high fiscal deficits and the ongoing increase in the U.S. public debt to GDP ratio pose risks not only for the U.S. but also the global economy. They stressed the pressing need for a frontloaded fiscal adjustment, through both revenue and spending measures, while redirecting some of the fiscal savings to programs to alleviate poverty. A structural and long‑term solution to address the issues related to the debt ceiling would also be beneficial.
Directors welcomed the decrease in financial risks since 2023 and the implementation of critical reforms, in particular those aimed at improving the Treasury market functioning. They noted that concrete actions are needed to mitigate the remaining banking system vulnerabilities and called on the authorities to fully implement the final components of the Basel III agreement, increase regulatory requirements for mid‑sized banks, and further strengthen supervisory oversight and practices. Directors encouraged the authorities to address the remaining FSAP recommendations.
Directors welcomed the U.S. voluntary assessment of transnational aspects of corruption and encouraged the authorities to implement the remaining OECD Working Group on Bribery phase IV recommendations. They also highlighted the significant role of migrant inflows in easing supply‑demand imbalances and noted that a more orderly approach to immigration would be desirable. Continuing to address climate related challenges also remains important.
Directors noted the ongoing intensification of trade restrictions as well as the domestic content provision in various fiscal programs, which create a risk for both the U.S. and global economy. They urged the authorities to unwind obstacles to free trade and instead bolster competitiveness through investment in workers and infrastructure. Working with international partners to address the core issues that risk undermining the global trade and investment system, including through concerted efforts to strengthen the WTO and ensure a robust and modern multilateral rules‑based system, will be critical.
Source – IMF