United States of America: IMF Staff concluding statement of the 2024 Article IV Mission

Washington D.C., June 27, 2024

A Dynamic Economy 

The U.S. economy has turned in a remarkable 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 outlook is for continued healthy growth supported by:

• A significant (and ongoing) rise in household wealth which should bolster consumer demand. Homeowners, in particular, have benefited from an almost 50 percent increase in the average house price since end-2019.
• A household and corporate debt service burden that has been insulated from increases in market interest rates. Notably, even as policy rates moved higher, net interest payments by nonfinancial corporates fell and net interest outlays by households saw only a modest increase.
• A material improvement in the terms of trade, in large part a product of the U.S. being a net exporter of natural gas, crude oil, and petroleum products.
• Large and ongoing supply gains from migrant inflows (expanding the workforce by almost 3 percent over the past three years), increased participation by native-born workers (particularly female, black and Hispanic workers), and rising labor productivity.

The near-term distribution of risks for activity are assessed to be broadly balanced. Consumption and investment could exceed expectations, driven by a healthy labor market, rising real incomes, and wealth gains. Similarly, supply side gains from higher productivity and the inflow of foreign labor could persist. On the other hand, downside risks could arise from the complex global geopolitical environment or from a slower path of disinflation and a resulting higher path for interest rates.

Progress in Disinflation 

The ongoing disinflation has taken a relatively light toll on the economy. PCE inflation peaked at 7.1 percent in mid-2022, the highest level since the early 1980s. The Federal Reserve responded 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. Policymakers were also fortunate that their efforts were accompanied by important supply-side gains. PCE inflation was 2.7 percent in April and is expected to return to 2 percent by mid-2025.

There are important upside risks to the outlook for inflation. The expected decline in shelter inflation may materialize more slowly, or reverse more quickly, than expected. Also, even with the sizable expansion in labor supply, nominal wage growth remains relatively high which could forestall the expected softening of non-shelter services inflation. An escalation of geopolitical tensions (e.g., from the Middle East conflict or war in Ukraine) could add to energy costs which would subsequently pass-through to wages and core inflation.

Monetary Policy

Despite the important progress to-date in returning inflation toward its 2 percent goal, the Federal Reserve should wait to reduce its policy rate until at least late 2024. With the economy humming along at an impressive rate, the U.S. has not paid a high cost to current monetary policy settings (i.e., in terms of slower growth, job losses, or reduced labor force participation). This provides significant room for maneuver within the Fed’s mandate of price stability and maximum employment. Given salient upside risks to inflation—brought into stark relief by data outturns earlier this year—it would be prudent to lower the policy rate only after there is clearer evidence that inflation is sustainably returning to the FOMC’s 2 percent goal. Furthermore, in the event that incoming inflation data runs hot in the coming months, serious consideration may have to be given to removing the loosening bias in Fed communications and, potentially, even further raising the federal funds rate. Continuing to clearly communicate the FOMC’s interpretation of incoming data, and adjusting forward guidance accordingly, should ensure that needed shifts in the monetary stance are well understood and smoothly absorbed.

The decision to reduce the pace of run-off of the Fed’s holdings of Treasuries will provide more time to judge the appropriate long-term size of the Fed’s balance sheet. The decision on when to stop the shrinking of the balance sheet will need to be handled carefully so as to prevent inducing volatility in short term funding markets.

Fiscal Policy

There is a pressing need to reverse the ongoing increase in public debt-GDP ratio. The general government fiscal deficit and debt are, as a share of GDP, 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. Such high deficits and debt create a growing risk to the U.S. and global economy, potentially feeding into higher fiscal financing costs and a growing risk to the smooth rollover of maturing obligations.

These chronic fiscal deficits represent a significant and persistent policy misalignment that needs to be urgently addressed. To put debt-GDP on a clear downward trajectory, a frontloaded fiscal adjustment will be needed that shifts to a general government primary surplus of around 1 percent of GDP (an adjustment of around 4 percent of GDP relative to the current baseline). There are various tax and spending options to achieve this adjustment over the medium-term. However, policies will need to go beyond finding efficiencies in discretionary, non-defense federal spending. Policymakers will need to carefully consider raising indirect taxes, progressively increasing income taxes (including for those earning less than US$400,000 per year), eliminating a range of tax expenditures, and reforming entitlement programs. Putting these measures in place will necessitate taking difficult political decisions over the course of multiple years. Some of the fiscal savings from these efforts should, though, be deployed to increase spending on programs to alleviate poverty. This should include reinstating a more generous, refundable Child Tax Credit (that is carefully targeted to lower income households) and raising the income threshold for eligibility for the Earned Income Tax Credit for workers without children.

The U.S. should also address shortcomings in its fiscal institutions that periodically lead to political stand-offs over the debt limit and the funding of the federal government. These create systemic risks to the U.S. and global economy that are entirely avoidable. Institutional changes should be designed to ensure that, once appropriations are approved, the corresponding space is automatically added to the debt ceiling. Similarly, in situations where the funding of federal agencies lapses because of an inability to approve appropriations, provisions should be made to automatically fund the federal government at some fraction of previous year’s funding until a full-year appropriations bill can be signed into law.

An Economy Returning to Balance.. 

Overall, the evidence suggests that the U.S. economy has largely returned to balance. Labor market imbalances have been mostly resolved with the economy now appearing to be operating slightly above maximum employment. By mid-2025, inflation is expected to return to the FOMC’s 2 percent goal which will, in turn, allow the policy rate to return to a neutral setting. The external position is assessed to be broadly in line with the level implied by medium term fundamentals and desirable policies. However, as described above, the fiscal deficit is much too large and the public debt is well above prudent levels.

… But With Important Risks Ahead 

While the economy is showing a better overall balance there are risks ahead to financial stability and from the ongoing increase in trade and subsidy distortions:

Financial System

Financial stability risks have diminished since the time of the 2023 Article IV consultation and some critical financial sector reforms are being implemented. For example, welcome steps have been taken to strengthen the functioning of the Treasury market and to better insulate money market funds from liquidity shortfalls. However, concrete actions have been lacking in mitigating the banking system vulnerabilities that came to light in 2023—including failings in bank supervision, the large share of uninsured deposits, and the risks created by the regulatory “tailoring” that was undertaken in 2018. There is a need, therefore, to fully implement the final components of the Basel III agreement, apply similar regulatory requirements to all banks with US$100 billion or more in assets (including supervisory stress tests), further strengthen supervisory oversight and practices, re-examine the coverage of deposit insurance, and recalibrate bank liquidity requirements and liquidity stress tests (to better take account of the potential for fast-moving deposit outflows and the potential losses that could be realized when long duration assets are liquidated). There is also a continuing need to increase the resilience of nonbank mortgage companies, particularly given the critical role they play in servicing a sizable share of U.S. mortgages.

Trade

The ongoing intensification of trade restrictions and the increased use of preferences in the treatment of domestic versus foreign commercial interests represent a growing downside risk for both the U.S. and the global economy. The U.S. should actively engage with its major trading partners to address the core issues—including concerns over unfair trade practices, supply chain fragilities, and national security—that risk undermining the global trade and investment system. Tariffs, nontariff barriers, and domestic content provisions are not the right solutions since they distort trade and investment flows and risk creating a slippery slope that undermines the multilateral trading system, fragments global supply chains, and spurs retaliatory actions by trading partners. These policies are ultimately bad for U.S. growth, productivity, and labor market outcomes and the evidence suggests their costs are largely borne by U.S. consumers and firms. The U.S. should unwind obstacles to free trade and seek instead to bolster competitiveness through investments in worker training, apprenticeships, and infrastructure. The U.S. should engage fully with efforts to strengthen the WTO (including through the restoration of a well-functioning dispute settlement system by end-2024), find common ground in areas such as tariffs, farm and industrial subsidies, and services trade, and conclude new WTO-based market-opening agreements. Finally, industrial policies should be confined to specific objectives where externalities or market failures prevent effective market solutions and, even then, they should minimize trade and investment distortions, be consistent with international obligations, and avoid discriminating between domestic and overseas producers.

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

Source – IMF

Press Conference: Update on the U.S. Economy, June 2024

June 28, 2024

PARTICIPANTS:

Moderator:

JULIE KOZACK

Director, IMF Communications Department

Speakers:

KRISTALINA GEORGIEVA, Managing Director, IMF

RODRIGO VALDÉS, Director, IMF Western Hemisphere

NIGEL CHALK, Deputy Director, IMF Western Hemisphere

MS. KOZACK: Good afternoon everyone, both to those of you joining us here in person and to everyone joining us online. Welcome to this IMF Press Conference on the conclusion of the 2024 United States Article IV Consultation.  I’m Julie Kozack, Director of the Communications Department here at the IMF.  By now you should have the IMF Staff’s concluding statement, which has also been posted on imf.org.

Let me start with introducing our speakers, Kristalina Georgieva, Managing Director of the IMF, Rodrigo Valdés, Director of the Western Hemisphere Department, and Nigel Chalk, Deputy Director of the Western Hemisphere Department and Mission Chief for the United States.  The Managing Director will start by delivering some opening remarks, and then we will take your questions in person on WebEx and via the Press Center.

Managing Director over to you.

MS. GEORGIEVA: Thank you very much Julie. Let me start by thanking the U.S. authorities and especially Chair Powell and Secretary Yellen for the engagement. We have had very constructive discussion that allowed us to finalize our concluding statement.  Today I would like to make four key points.

First on the performance of the U.S. economy, it has been remarkably strong. Activity and employment have exceeded expectations and the disinflation process has proven less costly than most feared.  The U.S. is the only G-20 economy whose GDP level now exceeds the pre-Pandemic level.  This is good for the U.S., and it is good for the global economy.  We expect growth to be a healthy 2 percent on a fourth-quarter over fourth-quarter basis and sustain a similar pace over the medium-term.

Inflation has declined in response to the Federal Reserve’s actions and we see inflation on a path towards the 2 percent target.  The Fed’s efforts were aided by important gains in labor supply including of women and strong productivity gains.  This is what makes U.S. economy so remarkable vis-a-vis its peers.  We expect core PC inflation to end this year around 2.5 percent and be back to target by mid 2025.

This being said, we do recognize there are important upside risks to this path.  Given those risks, we agreed that the Fed should keep policy rates at current level until at least late 2024.  The economy is doing well, which provides the Fed with significant room to maneuver.  The policy rate should be lowered only after there is a clear evidence that inflation is sustainably returning to the 2 percent target.

I want to recognize that a lesson we learned from the last years is we are at the time of more uncertainty.  This uncertainty also lies ahead.  We are confident however, that the Fed will move through that uncertainty with the same prudence it has demonstrated over the last year.  It would be guided by incoming data and will communicate carefully how it assesses progress in reducing inflation and the implications for the expected path of the policy rate.

My third point is on the significant exogenous shocks over the last years.  They have pushed further already high debt and deficit levels.  Now, when there is a strong economy, it is the time to arrest and reverse this trend.  U.S. has put in place significant fiscal legislation in ’21-‘22.  This legislation will have a lasting positive impact in reshaping U.S. economy.  It needs to be complemented however, with actions to put public debt to GDP on a decisive downward path through a broad range of policies that include raising tax revenues, addressing structural imbalances in the entitlement programs, and looking for savings in non-entitle — entitlement spending.

And finally, I want to recognize that there are reasons for the U.S. to pursue some measures in response to concerns about unfair practices, national security concerns, supply chain resilience that have led to tariffs and some measures to protect national content, that in our view maybe better addressed through more dialogue with trading partners.  We think it would be less costly for the U.S. and the global economy instead of relying on tariffs that are likely to lead to retaliation from trading partners, to go for more dialogue to promote fair trade, and to reinvigorate the rules-based international trading system.  That has served U.S. quite well.

So, these are the four points we have for you today, and with those, Julie, back to you, and I guess from you to our guests here and online.

MS. KOZACK: That’s right. Thank you, Kristalina. So, we’re ready for the Q&A session.  For those of you connecting virtually, please turn on both your camera and microphone when speaking.  I will also ask that you please introduce yourself and your outlet.  Please stick to one question so we can take as many questions as possible in the short time that we have.  And also let me remind you that this is a Press Conference on the United States.  If you have questions about other countries, we’d be happy to respond via our media and social outreach team.

Alright, so let’s start in the room.  let’s start with you.  Go ahead.

QUESTIONER: I was just wondering, you mentioned that you see inflation falling to the Fed’s target, 2 percent target, by mid 2025.  The Fed’s own median dot from its June forecast is for a 2026 return to target.  I just wonder why you’re feeling more optimistic about the U.S. inflation part than the Fed.  Thank you.

MS. GEORGIEVA: We actually had this discussion with Chair Powell that our expectation for inflation to come down to target is a bit more optimistic than the Fed’s assessment, and it comes from what we have seen as trajectory of inflation since its pick. And it’s — and if you take this trajectory, it gives us some confidence that it would lead to a tangible reduction in inflation and ultimately inflation going down to target by mid 2025.

We also see that a very important factor for the strength of consumer demand, which has been reliant on the boost in savings from the Pandemic time may be coming to an end.  Meaning that the strength that has defined this pressure on goods but especially services, it may be somewhat less evident.  And let me make sure that my colleagues —

MR. CHALK: Yes, I think that’s true, and I think the difference is really on where the distribution of risks are.  I think we both see risks to the upside of the Fed and our forecast.  I think we have built in more into the baseline the fact that the labor market’s cooling as the Managing Director said that consumption’s slowing.  We’re seeing signs that shelter inflation is finally coming down in a more consistent way. And so, I think when we build that all into our forecast, we get inflation coming down a little bit faster than the Fed, but it’s 0.2 or 0.3 on it

MS. GEORGIEVA: Is not a significance — significant difference. I also want to recognize that we do agree with the Fed that they need to be careful, they need to be cautious. It is just a matter of how we see the projected trend of inflation and we are a bit more optimistic.  May I say last year we were a bit more optimistic.  Last year, we have proven to be right.  May we be proven to be right next year 2025 as well.

MS. KOZACK: Alright, I’m going to go online. I see one hand up. So, David, why don’t you please go ahead

QUESTIONER: Good afternoon, Managing Director.  I just wanted to ask you in connection with the remedies that the statement lays out for the U.S. deficit and debt position, which include tax increases, including on people making less than $400,000 a year, which is something President Biden has explicitly ruled out, and painful entitlement reforms.  I’m wondering whether you’ve seen from your conversations with U.S. officials or any other source, any indication at all that the U.S. government is prepared to make those choices.  And if not, what are the consequences for the global economy?

MS. GEORGIEVA: We have had a very robust discussion, especially with Treasury on this topic and it is consistent with our views on their side, that there are steps that can be taken to reduce the deficit. Mind you, we are proposing a fairly long period of time over which these reductions should take place. We are talking about basically within this decade.  We are not talking about next year.  And our obligation is to present a package of measures that, in our view, would bring an outcome for the U.S. that would put the fiscal position of the U.S. in a stronger place.  Our justification is now is a good time.  The US economy is very strong, and it is in good times where you can do more to prepare yourself for risks in the future.

It is clear not just in U.S., elsewhere in Europe, in other countries, emerging developing economies, that taking action to create fiscal space for the future is difficult.  Politically difficult.  Difficult to bring the public on board.  Our view is that the more thinking that goes into bringing people on board, recognizing that ultimately it is for the benefit of the economy, the benefit of businesses and households that this is done.  The more of that, if you wish, education of people and bringing them on that notion that a strong fiscal position in a world where we experience more frequent and severe shocks is really a good thing.  And our part is to present justification for it, as we see it coming from evidence from the data.

MS. KOZACK: Okay, let’s go here.

QUESTIONER: Hi.  Thanks, Managing Director.  .  Just to follow up on the fiscal advice that you have for the U.S., I’m just wondering how concerned are you that the next administration will take things the other way and, you know, spend more and increase the debt further?  Are you trying to send a message here that this is really a place you shouldn’t be going?  And then also in terms of the consequences, you identify some rollover risk for U.S. debt.  What are the consequences for the world economy?  If we get into a position where the U.S. is really sort of having trouble finding buyers for Treasury?  Thank you.

MS. GEORGIEVA: What our role is to objectively assess the status of any economy, in the U.S. or any other economy, and then present a policy path that, in our view, would serve the economy and its people well. And that is what we have done with this report as we have done it in any other country. It is — we don’t speculate about political developments in any country.  We know that it is the voice of people that would determine any administration.  Our duty is to present the picture the way we see it, and as objectively as possible, define what combination of measures can lead to a good outcome.  So, I think I can go back into — and actually the administration has made some suggestions in that regard, to measures that are related to raising more revenues that has to be done, measures that can be taken to improve the quality of spending, and also reduce spending in some area, and then leave it to the country to do what is considered best.

MS. KOZACK: There is also a question on the rollover risk.

MS. GEORGIEVA: Oh yes, I’m so sorry. So here we are in a country where when you look at the debt servicing costs, they remain quite manageable in a country where the economy is performing extremely well, where the good performance is driven by productivity. And when look at these conditions, we actually think that fast forward the U.S. can carry this debt and we, you know, see no signs of the interest in investing in the U.S. economy to weaken.

In fact, when you look at money on the move, before the Pandemic, 18 percent of financing seeking return outside of national borders came to the United States.  Now it is 33 percent.  33 percent of money on the move come to the U.S.  Why is that so?  Because of the strong performance of the economy and when you compare U.S. to, for example, the Eurozone, what you see are three very significant differences.  Number one, innovation driven economy and productivity as a primary source of growth.  Number two, energy security.  Energy independence and ability, especially when you think about data centers and AI to secure the energy necessary for them.  Number three, ability to tap into labor both in terms of getting people back to work, getting more women to go to work, and being an attractive place for people from other countries to come to.

So when you look at this context, our judgment is that the U.S., U.S. debt is sustainable, remains sustainable, and at the same time we are saying, look, that level have gone up, deficit has gone up.  Yes, you can carry it, but if you can bring it down you would have an even stronger path for the future.

MR. VALDÉS: Perhaps just one. We’re far away from any rollover risk in the U.S., but at the same time it’s something that you never want to test. So basically have space for carry on and make the economy even stronger.  This is one of the challenges that we see for the medium run.  That is everybody understands that the fiscal needs some work, but it’s not that we are even close to problems.

MS. GEORGIEVA: I mean the issue is always, I remember my predecessor, Christine Lagarde, would say when the sun is shining, fix the roof. But like ordinary people who fix the roof more often when it is leaking, there is a temptation for economists to postpone decisions related to debt and deficit for the future rather than take them when the sun is shining, when conditions are good. So, what we are doing is to add that voice of reason.  You are in a good place, take advantage of it.  And then you know the saying you can take a horse to water, you cannot force the horse to drink.

MS. KOZACK: So, I’m going to take one question that’s come in through the Press Center and then we’ll have time for one additional question, and I’ll give that one to you. But first let me read the question. The U.S. Federal Reserve is delaying its rate cuts.  What would be the impact on the U.S. economy and what would be the impact on the global economy and emerging economies of this delayed rate cut?

MS. GEORGIEVA: Well, let me first clarify that we do not believe the Federal Reserve is delaying rate cuts. What the Fed is doing is to be cautious to go for rate cuts when conditions are right, when there is full confidence that there would be no reversal in inflation. And stress that this is important for the U.S., but it is also important for the rest of the world.  Because if inflation in the United States is not sustainably brought back to price stability, to levels that give confidence, that would be detrimental for the U.S.  But it also risks instead of seeing gradual rate cuts to go for the opposite, to have the Fed to need to actually tighten.

So that caution the Fed is exercising is justified.  When we look into the prospects, from our perspective, we still see the potential for one rate cut within 2024.  Of course, based on only on confirming that disability of this cut data, and then we see potentially further cuts in 2025.  Very important for the rest of the world because when interest rates are high for those who finance themselves in dollars, that causes increase in debt servicing burden.  And what we also know, is that when the interest rates are high, the dollar is high.  The flip side of it is many national currencies depreciate, making it harder for countries with depreciating currencies to fight inflation on their own ground.

MS. KOZACK: Okay. Last question is for you.

QUESTIONER: Yes.  thank you, Managing Director.  I wanted to ask you about this theme of fragmentation that we keep hearing from the Fund because we, certainly in the U.S. election, we have the first presidential debate tonight, we’ve seen the current administration, which has quadrupled tariffs on the electric vehicles, added some new tariffs on electric vehicles from China, added new tariffs on semiconductors, and some other areas.  As well as an alternative in the main opposition candidate, who is on the campaign promising 60 percent tariffs on China, 10 percent on the rest of the world.   How worried are you that, as David asked, on the debt and deficit side, that the trend in the U.S. is only getting towards more protection — more protection — excuse me, more fragmentation and, you know, just a greater presence of trade barriers and the opposite of the direction that the Fund is recommending the U.S. pursue?

MS. GEORGIEVA: Well, let me start by stressing that the U.S. is a very open and highly competitive economy. Even with the measures that have been taken, it remains a place where trading with the rest of the world is very active. My second point is that to recognize that over the last years there has been clear evidence of two things.  One, the decades of globalization have led to overall positive outcomes, but negative consequences for some communities, including here in the United States, with jobs disappearing as a result of cheap imports from other countries.  And we, all of us economists, we have been somewhat complacent to reflect on that unfairness of the impact of globalization and a bit slow to see how that translates into a pushback on what is actually a very good thing for the world economy, for national economies, for people, especially for poor people, because it brings lower prices, and it brings bigger access to goods and services.

Not just in the United States.  If you look at the outcome of elections in Europe, it indicates that this is a genuine concern of a very big part of populations, and it has to be taken seriously.  And the second observation that we must make is that both the Pandemic and the war in Ukraine, Russia’s war in Ukraine, they have demonstrated the fragility of supply chains and they have reinforced the message that supply chain security is an economic priority.  It has to be taken seriously.  When you put on top of it the increasing geopolitical tensions, especially since Russia’s war that have made national security a bigger preoccupation, even from an economic perspective, we end up with measures that countries are taking, not just the United States, that are taking to provide security of supply and also to look at ways in which their national interests are best protected.

Now at the Fund, we recognize these trends.  And at the same time we are loud and clear on the need for dialogue and solving differences and being and moderating this impact of strengthening security of supplies, taking measures that have been in United States and elsewhere, now more popular.  We would like to bring that voice of reason in the future.  We would do it now.  We do it in this report.  We do it in our broader work.  Because we genuinely believe that there can be fair and inclusive rules-based international trading system that is mindful of these lessons from the last years.  In other words, don’t throw the baby with the bath water.

MS. KOZACK: And with those final words, I will thank all of you for joining us here today. We’re bringing this Press Briefing to an end. The transcript will be available, as always, on imf.org.  If you have any additional queries, please do not hesitate to reach out to media@imf.org.  And thank you all for joining us today.  We wish you a wonderful day.

Source – IMF