Washington, DC : The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with the United States.
The U.S. economy has proven resilient in the face of the significant policy tightening that took place in 2022. Consumer demand has held up particularly well, boosted initially by a drawdown of pent-up savings and, more recently, by solid growth in real disposable incomes. Prime age labor force participation has risen above its pre-pandemic peak, the unemployment rate for women and African Americans has fallen to historical lows, and real wages have been rising faster than inflation since mid-2022. Nonetheless, the significant reduction during 2021 in the share of the population living in poverty has largely been unwound, as pandemic benefits have expired and real wage growth for low-income workers has moderated.
The strength of demand and in labor market outcomes has contributed to a persistent inflation problem. While goods inflation has moderated and shelter price growth is expected to slow in coming months, nominal wage increases are feeding into non-shelter services prices. Core and headline PCE inflation remain materially above the two percent target of the Federal Reserve.
Fiscal policy is expected to be procyclical in 2023 on a general government basis, following a significant fiscal contraction in 2022 due to the unwinding of major pandemic related fiscal measures and higher tax receipts. While the U.S. retains some fiscal space, public debt is well above pre-pandemic levels and is expected to continue to increase over the next decade, as aging-related expenditures on healthcare and social security feed into the debt dynamics.
Monetary policy has been assertively tightened. Interest rates have risen by 500bps since March 2022 and are expected to remain at or above the current level well into 2024. The process of shrinking the Federal Reserve's balance sheet is ongoing.
Recent bank failures reflect the challenge of sizable unrealized losses on assets in the rising interest rate environment, while substantial amounts of deposits remain uninsured. Blanket guarantees were extended to depositors at failed banks where the deposit franchise could not be sold. The Federal Reserve provided systemic liquidity support, including a new facility to reduce the need for banks to liquidate assets in times of stress. These actions have stabilized deposit outflows and restored confidence to the banking system.
Executive Board Assessment[2]
Executive Directors agreed with the thrust of the staff appraisal. They welcomed the continuing resilience of the U.S. economy in the face of the significant tightening of monetary and fiscal policies in 2022. Directors noted, however, that resilient demand and strong labor market outcomes have contributed to more persistent inflation. Going forward, bringing inflation down remains a priority. Efforts to tackle longer-term issues-including bringing down public debt, and addressing supply-side constraints and decarbonizing the economy while avoiding protectionism-also remain necessary.
Directors emphasized that bringing inflation back to target will require an extended period of high interest rates. Nevertheless, Directors also highlighted the potential risks to global activity and financial stability from a prolonged period of tight monetary policy, especially in light of recent bank failures, and careful monitoring will be necessary. Directors stressed the importance of clear communication of the Federal Reserve's assessment of incoming data and its implication for the path of the policy rate.
Directors recognized that in the short term, a tighter fiscal stance would ease some of the burden shouldered by the Federal Reserve in reducing demand and inflation. Over the medium term, more determined action will be needed to put public debt on a decisively downward path, including tax increases and tackling structural imbalances in social security and Medicare. Directors also called for a permanent solution to the debt ceiling.
Directors commended the authorities' prompt response to recent bank failures but observed that the bank failures illustrate the systemic risks posed by even relatively small financial institutions. Directors called for improved stress tests, more stringent requirements for mid-sized banks, including aligning capital and liquidity requirements with the Basel framework, and for a more assertive supervisory stance. Directors encouraged the authorities to address remaining FSAP recommendations. They welcomed their governance and anticorruption efforts in the financial sector, including plans to close gaps in the AML/CFT framework.
Directors noted that the U.S. external position remains moderately weaker than implied by medium-term fundamentals and desirable policies. Noting that "Made in America" policies in recent legislation include provisions that favor goods and services produced in the U.S. or North America, Directors urged the authorities to maintain open trade policies and work to strengthen a rules-based multilateral trading system. Directors welcomed the proposed supply-side policies including expanding access to healthcare and education and incentivizing labor force participation, but recommended that these policies be implemented in a manner that supports a downward path for public debt.
Directors welcomed the climate provisions in the Inflation Reduction Act as a means to decarbonize the U.S. economy. They noted that the U.S. climate goals could be achieved without introducing domestic content requirements. They also noted the need for additional efforts to ensure emission reductions reach the U.S. objective, which could include building consensus on carbon pricing. Training and financial support for the most affected workers would facilitate a faster reallocation of labor and lower societal costs of the transition.
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 .
