Transcript of a Press Conference on the Concluding Statement of the United States IV Consultation
June 14, 2013June 14, 2013
Christine Lagarde, Managing Director, IMF
Alejandro Werner, Director, Western Hemisphere Department, IMF
Gian Maria Milesi-Ferretti, Mission Chief to the U.S., IMF
Roberto Cardarelli, North American Division Chief, IMF
Gerry Rice, Director, Communications Department, IMF
|Webcast of the press briefing|
MR. RICE: Good morning, everyone, and thank you for coming to this press conference on behalf of the International Monetary Fund. This is a press conference on the concluding statement of the 2013 Article IV Mission to the United States, and I am delighted that we have with us this morning Managing Director of the IMF, Christine Lagarde.
We are on the record this morning, I would ask you to keep your questions focused on the topic, fairly short, and please identify yourselves by name and affiliation. And, with that, I would ask the Managing Director to make a few opening remarks. Thank you.
MS. LAGARDE: Thank you very much, Gerry, and good morning to all of you. We just concluded this week with a meeting with the U.S. Treasury Secretary, Jack Lew, the Article IV work that has been done over the last few weeks by the U.S. team. We had a meeting the week before with Fed Chairman Ben Bernanke. Fund staff will present formally its findings to the Executive Board at the end of July, and after that, the full report will be published, which will provide, indeed, more in-depth analysis of our assessment.
What I would like to do today, briefly, is present for you the outlook as we see it, and then discuss both the risks and the policy recommendations. In terms of outlook, we see that the recovery in the United States of America is gaining ground and becoming more durable. The housing market, the household balance sheets and the labor markets are generally doing better. The private sector is leading, and easy financial conditions have helped.
However, the economy has a way to go before it returns to full strength, unemployment has fallen, but it is still too high at about 7.6 percent, and the effect of the sequester and deficit reduction more generally are already affecting the economy. We expect growth this year to be at 1.9 percent, the deficit will likely decline by 2.5 percent, which is very significant, and that will, in our view, shave 1.25 to 1.75 percentage points of growth. Next year, the focus for growth should be better, picking up to 2.7 percent, which will obviously depend on various conditions; one is fiscal adjustment becoming more moderate, two, the housing market continuing to strengthen, and three, continued support for monetary policy.
Now, let me turn to the risks and the policy recommendations. The first risk, of course, is of external nature, and that is a possible renewed financial stress on the markets, notably coming from the Euro area, which would affect the United States. But most of the risks, as we see them, are closer to home, and the major one is clearly that of too strong deficit decline. The sequester and other deficit reduction measures, for example, would have a stronger-than-expected impact. That's a potential risk. Another fiscal worry is doing too little further down the road after having done too much this year.
So what is our advice on fiscal policy, given those two risks? Well, it's slow down, but hurry up, or hasten slowly, as Boileau would have said a few centuries ago. Now, what do I mean by that, slow down but hurry up? Well, slow the adjustment this year. For instance, repeal the sequester and adopt a more balanced and gradual pace of fiscal consolidation. This would help the recovery at a time when monetary policy, which has been very helpful, has now limited room to support it much further. The sequester cuts not only reduce growth in the short term, but they also hurt the most vulnerable and they produce very undesirable effect in that regard. They should, in our view, be replaced with a better balanced program with a mix of back-loaded entitlement savings and new revenues.
The second policy that we recommend is clearly to expeditiously raise the debt ceiling so as not to complicate further the situation and avoid yet another lengthy and unnecessarily debate about the debt ceiling. Now, our advice is not just to slow down, I remind you that, this year, it's a 2.5 percent deficit decline, which is very significant. Our advice is also to hurry up.
Hurry up with putting in place a medium term road map to restore long-run fiscal sustainability. Because the deficit is falling fast at the moment, 2.5 is big, but if you look down the road, in, say, five years, there will be significant increase of interest outlays and probably significant increases in health care costs. And that would widen the deficit, and it would increase debt. We figure that the additional interest outlays would be in the range of 2 percent of GDP and the additional health care costs would likely be in the range of 2 percent of GDP, as well. So it remains essential to adopt a comprehensive and back loaded plan with both lower growth in entitlement spending and higher revenue. Now, you might ask what's the urgency, the problem is down the road, we can do things later on. Well, those measures, if they are taken early on, which is why we say hurry up, if those measures are taken early on, will not be as painful, simply because they will take time to produce results, but those results would effectively be very meaningful in a few years' time, because the effects build gradually, over time. One of the classic examples of such reforms and changes in entitlement regimes is the reform of pensions. So fiscal policy constitutes a major area of risk.
The other major policy risk is the sequencing of the phasing out from the extraordinary degree of monetary policy stimulus that we have seen. And unwinding monetary policy accommodation is likely to present challenges, including for financial stability. So this needs to be managed carefully. In our assessment, there's no need to rush to exit from monetary accommodations, given the still large output gap, given the subdued growth that we have, and given the well-anchored inflation expectations.
We know that the Fed has a large range of tools that it can use, effective communication is one, careful timing, all of that will be critical with a view to avoiding disruption for the U.S., but also for other countries.
One final recommendation in our set of policy recommendations is the one that concerns the financial sector. We believe that the financial sector reform that has been undertaken must be completed in a number of areas, regulation of money market funds, as recently proposed by the SEC, Basel III total implementation, the Volcker rules to strengthen and safeguard the U.S. financial system. Those are three examples where reform has to continue and be completed.
And these are particularly significant, given the global major role played by the U.S. financial market, they will be critical for the U.S. market, they have been mindful of external effects, as well. As a result, they should be well coordinated with the global financial reform agenda that is underway.
Before I take your questions, I would simply, on behalf of the team that has worked long and hard on this Article IV to acknowledge the excellent cooperation that we have enjoyed with all authorities, particularly with the Treasury, and, of course, the Federal Reserve Bank.
With that, I will turn it over back to you, Gerry, for questions.
MR. RICE: Thank you, Managing Director. Again, please keep your questions focused and short, and identify yourselves. Let's start over here, the gentleman in the second row.
QUESTIONER: Thank you, Gerry. Madam Lagarde, I want to ask, has the U.S. government done enough to support the housing sector recovery in the country? If not, what else should be done to boost the recovery? Secondly, if I may ask, in the medium term, what specific measures should the U.S. government take to reduce the entitlement costs, and what specific revenue can the government get to improve its fiscal situation? Thank you.
MS. LAGARDE: Thank you very much for your very specific and technical question, which is going to help me give the floor over to Gian Maria, because he's more knowledgeable about the actual details. Let me just say, you know, to preface his remarks, we have seen significant improvement in the housing market, there's no question about it. And there has been a turnaround of the construction sector, as well, which is an indication that new programs are coming to the market. But we do think that more can be done, particularly in the area of government supported programs. So, Gian Maria is going to address that.
On the entitlement cost reform, you know, one area that comes to mind is clearly on the pension side, because those are the kinds of long-term reforms that, if taken early on, actually produce the appropriate results down the road. Not for the vested interests, not for those are pensioners, but those that will be eligible to pensions down the road. In the area of health care, there are reforms, as well, that must be considered. It's an area where there is a combination of innovation and additional cost, innovation and reduced expenses, as well, where clearly the balance has to be fine tuned with the view to reducing overall cost.
But, Gian Maria, I'll let you address the technical aspect of his questions to get a better answer.
MR. MILESI-FERRETTI: Thank you. On the housing market, the U.S. government has implemented a number of programs that have provided much needed help, some were programs to make it easier for mortgages to be modified, the Home Affordable Mortgage Plan, HAMP, is one of them, and it was recently extended, which is very good news. It is helping underwater borrowers, in particular, get more affordable mortgages. A second program that has been very important is a program called HARP that has eased access to refinancing for households that have been current on their mortgages throughout the period, but have been unable to get refinancing because the value of their houses has dropped a lot, and therefore, banks are reluctant to extend a new mortgage with very little equity or even negative equity in the house.
Those programs, in particular, the program of refinancing could be extended, it is currently only for mortgages that are guaranteed by what in the U.S. are called GSEs, Fannie Mae and Freddie Mac, government agencies that are in the mortgage market. But this program could be extended meaningfully to ease refinancing also for mortgages that were not guaranteed by Fannie Mae and Freddie Mac. And this is actually something that the administration has proposed, but it needs legislative action in order to be implemented. That's on the housing market, but we see a recovery really picking up speed.
Also, to ease the adjustment of the housing market, you want to bring product capital back in, and therefore, expeditiously completing all the regulatory reforms that have to do with the housing finance sector would also help on, say, making it easier for households to obtain mortgages because financial institutions have more certainty about the future.
On the entitlement programs, I would say it's relatively straightforward conceptually to say what you can do on the pension side, as the Managing Director was saying.
You can change, as the Administration has proposed, the indexing of pensions to appraising that better reflects the actual increase in cost of living, the so-called chained CPI, it would generate some savings, and you could simply raise the eligibility age for Social Security benefits, raise the retirement age, and that also clearly generates savings.
For health care costs, it is much more difficult to pin down something as simple as to just change in parameter, it's a very complex problem. But, clearly, there is a possibility of sort of phasing out some of the tax benefits that accrue to the high end health care plans, for example, and that would entail some meaningful savings for the government. And there are a number of other measures we are going to go into more detail in our report that can help contain the rate of growth of health care costs.
MR. RICE: Thank you, Gian Maria. I'm looking for the lady in the front.
QUESTIONER: I have a question regarding the Fed. The risk you mention of exiting QE policies, don't you think that started to materialize already, given the reactions we've seen in emerging markets and even the rates on U.S. Treasuries, and your forecast takes into account QE at current levels extending throughout the end of the year. What do you see, what did you take into account for 2014?
MS. LAGARDE: You know, in terms of U.S. monetary policy, we are seeing clearly that communication will be key in order to monitor expectations and in order to reduce uncertainty. And this will certainly be seen in the weeks and months to come. Good communication, it is certainly an expectation that we have made in our, in the hypotheticals that we use for the forecast. In terms of hypothesis for next year's forecast, I think we have assumed a slight, very slight decline. No tightening, very slight decline. That's what we have forecasted. And that's obviously depending on circumstances and based on the parameters that have been identified by the Chairman of the Fed, namely an improvement of the labor situation and clearly with an eye on the inflation target.
MR. RICE: Thank you. The gentleman, yes.
QUESTIONER: Just a follow up a little bit on that, could you be a bit more specific by what you mean by good communication, and is the Fed communicating well at this point? Thank you.
MS. LAGARDE: I would certainly not dare to assess and value and rank the communication. I just, you know, my point is to say that, amongst the many tools that Central Bankers can use both in terms of stimulating monetary policy or unwinding of stimulatus… monetary policy, communication is one of the tools, which should be used appropriately and timely by the presidents of those institutions, the same is true for the Chairman of the Fed, the same is true for the President of the ECB, and so on and so forth.
MR. RICE: Okay. The lady here, yes.
QUESTIONER: I'd like to ask you a question about, I'm seeing your current projections for the 2014, big growth, and it's 2.7 percent, I believe in April it was 3 percent. Can you account for that slow down or downgrade of your projections? And on the risk front, do you think that the Euro zone risks have subsided for the U.S. economy?
MS. LAGARDE: I think there is a very straight answer to your question. We did, in fact, reduce our forecast for 2014 from 3 percent to 2.7 percent because we had assumed that the sequestration would be phased out. In this latest forecast at 2.7 percent, we do not assume that sequestration will be phased out, we assume that it will continue. Not increase, but not be withdrawn, either. We haven't done the Article IV for the Euro zone, you have to wait a couple of weeks, July 8th.
MR. RICE: The gentleman in front.
QUESTIONER: Please forgive me, I may have missed part of your answer on this, if I may just follow up. To be clear, this year's assumption includes, assumes 85 billion in bond purchase a month until the end of year, and then, next year, there's a, as you say, I think, a very slight decline. And you're saying that, I think what you were saying is that the volatility seen recently in markets is a sign that the Fed's communication strategy must be carefully calibrated.
And, finally, if I may gently press on the troika, there's been a brouhaha about whether there's internecine squabbles, whether the troika works at all, and I wonder if you might be able to address that.
MS. LAGARDE: Okay. So, to your three questions. The first one on the clarification about the assumption that we have made for the purpose of the forecast, and I speak under Gian Maria's control, because he's the one who is controlling the set of assumptions. I think we have assume that had we have a program of 85 billion monthly purchases until the end of this year, and then from 2014, a slight decline of the volume of bond purchases on the monthly basis. So very gradual phasing out later in 2014, depending on circumstances. But those are the assumptions that we make for the purpose of our concluding statements.
No. I did not say that the volatility recently seen on the markets was a result of any particular communication. I think that we have seen very low volatility for many months, and we are beginning to see a bit more volatility, and that's probably a return to a different set of circumstances which have many, many ingredients.
On the troika, the troika relationship has been of a very unusual and exceptional nature, just as the crisis has been. Very unusual, very exceptional. But it has been a solid cooperation, constant cooperation, and I will tell you something, I think there is not a week that goes by without Olli Rehn and myself speaking on the telephone, sending each other messages, text, mail, or whatever. So I'm very happy with the cooperation.
MR. RICE: Thank you for your question, and we're going to try and focus the questions today on the U.S. concluding statement, okay. The lady right here. Thank you.
QUESTIONER: My question is about the impact of the QE. So, last time in the spring meetings, you've warned the increasing risks in emerging markets, and after Chairman Bernanke sent a signal of ending the QE, we're seeing some fluctuations of either on stock market or exchange rate of some countries. So do you think his signal mitigates or increases the risks of emerging markets? Thank you.
MS. LAGARDE: You know, I really don't want to join the ranking of the over interpreters or under interpreters of Chairman Bernanke's statements. What we see is a monetary policy that has been extremely useful, that we believe should continue under the circumstances. And what we're saying is two things, the unwinding, when it comes, should be very carefully managed using both communication and all the other tools available. And the second thing we're saying is that it has to be mindful of its consequences at home, but also of the potential spillover consequences abroad.
MR. RICE: Thank you. Gentleman in the front row. Thank you.
QUESTIONER: I have two questions, if I may. The first question is about the United States. Just to be very clear, you warn in the report about an overreaction of financial, potential overreaction of the financial markets to a gradual unwinding of QE3 in the United States. When you look at the events happening during the last weeks, do you think that that is already an overreaction to some kind of expectations building up in the markets? And that could endanger the world economy.
And the second question, I'm sorry to ask again, I have to ask for the Euro zone once again, please, on the troika issue. There were very harsh words about the IMF/Euro relation and the troika coming out of Europe during the last days. Mr. Regling has said, and I quote him, that the IMF does not understand the rules of the European Monetary Union. Mr. Barroso said today or yesterday evening that the aims and division of IMF and EU are different. Can you comment on that, and what do you see coming out of that for the future of the troika?
MS. LAGARDE: On the quantitative easing, as I said, we believe that the monetary policy has been necessary and helpful, and has allowed breathing space that should be used for fiscal policy purposes by the authorities. We are saying that the unwinding, when the time comes, depending on circumstances, should be carefully managed with all the appropriate communication and other tools available to the Central Bank: in this situation, the Federal Reserve Bank. And this is a process that will be with us, you know, over months and months and months, so we are not riveted on yesterday or the day before or this week's variations, we have to look at a longer term horizon.
On your second issue, you know, our dealings in the troika are with the European Commission and with the European Central Bank. I repeat what I said, it's a very unusual and exceptional relationship because it's a very unusual and exceptional crisis, and I'm personally very satisfied with the degree of cooperation and the level of understanding that we have had with the troika partners. I saw Mr. Barroso over the weekend and we had a good chance to discuss that, and as I said, I work on a very regular basis with the Vice President of the Commission, Mr. Olli Rehn. Those are my counterparts.
MR. RICE: Thank you. I think we have time for maybe two more questions. The gentleman in the front.
QUESTIONER: Thank you. Thank you very doing the event, Managing Director. You referred to well- anchored inflation expectations in the U.S., but rising tensions in the Middle East, including around Syria, raise the risk of an upsurge in oil prices. Do you feel that the U.S., and the world economy, for that matter, are prepared for such a risk at this point?
And also, I also want to use this opportunity to ask a different question slightly off subject, but of general type. President Putin, again, as you probably know, raised the issue of reforms in the IMF, he believes the IMF is lagging behind events, both with taking the necessary decisions and implementing them. So what is your response to that, please? Thank you.
MS. LAGARDE: On the, your question about energy and how the price of energy can impact the U.S. economy and possibly inflation. Obviously, any geopolitical risk in countries that are oil producing countries constitute a risk in and of itself. But, clearly, the U.S. economy is better positioned, I would say, almost by the month, given its energy policy mix and the reliability of the shale gas reserve and the, as I said, the policy mix, which includes both non fossil and fossil sources of energy.
So, while a risk, as a matter of principle, I believe that this economy is probably better protected against that risk than it was, than many other economies.
On the other issue, I'm very much looking forward to seeing President Putin on Tuesday on the occasion of the G8 Summit. I know that he has high regard for the institution, he has told me so, and I also know that he is very keen to see it properly reformed, as the 2010 governance reform calls for.
MR. RICE: Thank you. So we'll take one last question. And this gentleman in the front has been trying. Thank you, sir.
QUESTIONER: I've got a question regarding the QE. So the U.S. is the continuating with the $85 billion per month until the end of this year. So could you explain why it's best to taper the QE in June or September?
MS. LAGARDE: First of all, the decision is not ours, right, all we do is make assessments and policy recommendations. The decisions are made by independent central bankers. But, given the parameters that have been outlined, such as the improvement of the unemployment situation and the inflation targeting, if you take these two parameters, well selected, they clearly don't lead to a short term revision of the monetary policy that has been decided.
MR. RICE: Well, thank you very much, everyone, for coming, and we'll see you again soon. Thank you.