July 12, 2022
Washington, DC : 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 recovered quickly from the pandemic shock. The positive effects of unprecedented policy stimulus, combined with the advantages of a highly flexible economy, have resulted in an unemployment rate that is back at end-2019 levels, output that is now close to its pre-pandemic trend, wages have increased rapidly for lower income workers, poverty has fallen, and 8.5 million jobs have been created since the end of 2020.
However, the rapid recovery of demand and associated depletion of slack, rising energy prices, and ongoing global supply disruptions have led to a significant acceleration in inflation. Wage and price pressures are broad based had have spread quickly across the economy. Longer-run measures of inflation expectations have started to drift higher and shorter horizon measures of inflation expectations have increased significantly.
During the pandemic, the overall general government deficit rose by close to 9 percent of GDP with the US$1.9 trillion American Rescue Plan—passed in March 2021—slowing the pace of fiscal contraction in 2021–22 but not forestalling it. The fiscal deficit is now declining rapidly but, despite this, public debt is markedly higher than its pre-pandemic levels and is expected to continue to rise as a share of GDP over the medium term (as aging-related expenditures on healthcare and social security feed into the debt dynamics).
Finally, monetary policy has begun an assertive tightening cycle with interest rates rising by 150bps so far this year and expected to continue to increase at a fast pace in the coming months. At the same time, the process of shrinking the Federal Reserve’s balance sheet has begun.
Executive Board Assessment [2]
Executive Directors agreed with the thrust of the staff appraisal. They welcomed the strong economic recovery from the COVID-19 shock as a result of the unprecedented monetary and fiscal policy support. Directors noted, however, that the rapid rebound is accompanied by a broad-based surge in inflation, posing systemic risks to both the United States and the global economy. In this context, they stressed that the policy priority must be to expeditiously slow price growth without precipitating a recession.
Directors welcomed the June monetary policy tightening and the decision to provide forward guidance on the path for the federal funds rate, which should create the necessary up-front tightening of financial conditions to quickly bring inflation back to target. Directors stressed the need to telegraph, well in advance, clear guidance on the path for the policy rate to ensure that the withdrawal of monetary accommodation is orderly and transparent. As part of the policy mix, a number of Directors also saw merit in implementing a medium-term strategy for fiscal deficit reduction, which would help place public debt on a downward path and support anchoring inflation expectations.
Directors recognized that calibrating the response to inflation comes with high stakes and that misjudging the policy mix—in either direction—will result in sizable costs at home and negative spillovers to the global economy. They concurred that avoiding a recession in the United States is becoming increasingly challenging and that the Russian invasion of Ukraine, the lingering COVID-19 pandemic, and supply side constraints create additional challenges.
Directors welcomed the resilience of the financial system despite the adverse shocks of the past two years and the establishment by the Federal Reserve of two new facilities to maintain the smooth functioning of financial markets. In this context, Directors encouraged the authorities to implement the remaining FSAP recommendations to further strengthen the financial system.
Directors welcomed the passage of the Infrastructure, Investment, and Jobs Act but emphasized that passing the rest of the administration’s reform agenda is crucial to foster the supply side of the economy and contribute to reduce inflation. They called on the authorities to continue making the case for strengthening the social safety net and for changes to tax, spending, and immigration policies that would foster labor force participation, investment, and innovation. Directors also recommended rolling back the trade restrictions and tariff increases that were introduced over the past five years. More generally, they called on the authorities to work actively with trading partners to strengthen the rules-based multilateral trading system centered around the WTO.
Directors called for more determined action to facilitate a smooth transition to a low carbon economy and achieve the climate goals. They recommended broad-based pricing of carbon and other pollutants, sectoral feebates, regulatory restraints on emissions, the elimination of subsidies for fossil fuels and carbon-intensive agriculture, and a reprioritization of public spending toward mitigation and adaptation goals. Directors stressed the importance of meaningfully supporting those who bear a disproportionate share of the burden of adjustment.
It is expected that the next Article IV consultation with the United States will be held on the standard 12-month cycle.
[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.
[2]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. An explanation of any qualifiers used in summings up can be found here:http://www.IMF.org/external/np/sec/misc/qualifiers.htm.
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