Transcript of a Press Conference on the Concluding Statement of the U.S. Article IV Consultations
June 16, 2014June 16, 2014
MR. RICE: Good morning, everyone and thank you for coming to this press conference on behalf of the IMF. Our topic today, as you know, is the concluding statement from the staff on the Article IV consultation with the United States.
Delighted to have with us this morning the Managing Director of the IMF, Madame Christine Lagarde. Let me also introduce to you, Alejandro Werner, who is the Director for our Western Hemisphere Department. To his right is Nigel Chalk who is the Mission Chief for the United States, and to his right, again, is Roberto Cardarelli who is the Division Chief for North America.
I would ask you this morning, please, since we are on the United States to focus your questions, please, on the United States, and to make them short so we can include as many colleagues as possible. With that, I will ask the Managing Director to make a few opening remarks.
MS. LAGARDE: Well, thank you, Gerry, and good morning to all of you. Welcome to this press conference on the concluding statement of the Article IV on the U.S. I'm assuming that you have received a copy of the concluding statement beforehand. What I will try to do is focus on the key messages that we have.
By the way of background, it's been a while since we have not done a concluding statement when there is no domestic crisis, when there is no recession, and that has given us a chance to actually focus on long-term growth trends as well as the structural reforms we see as ways to support both growth and jobs.
Turning to growth and numbers. You will have noted that we have revised downwards our growth forecast for 2014 down to 2 percent. That is largely attributable to the poor results of Q1 which are largely, not entirely, but largely weather related.
It's not the main message that we want to give on growth. We believe that this slowdown is temporary and better prospects lie ahead. We are saying that on the basis of employment numbers and the indices of industrial production that are showing gaining economic momentum.
There, of course, risks to the outlook, and we have seen weakness in housing and business investment that could continue to be a drag in the future. Nonetheless, we believe that there will be growth in the remaining quarters at about 3 percent or possibly higher than that. In 2015 we expect growth to hit its highest annual rate since 2005.
Now, we've also looked at the trend for growth going forward, and essentially based on the aging of population and productivity trends, which have not kept up with earlier expectations, we have revised downwards our projection for the long-term growth rates of the United States to around 2 percent. That is clearly, significantly lower than the 3 percent average that we have seen between 1948 and 2007.
Now, let's look now at what we call the scars of recession, which are still visible. The first one is the long-term unemployment level which is too high with 3.4 million unemployed people, and those who have been unemployed for over 27 weeks. Labor force participation is also low, too low, as too many productive workers have simply stopped looking for work. Third number, almost 50 million Americans live below the poverty line.
So what are our policy recommendations in the face of that? They come in three key areas. One focuses on jobs, growth, and poverty reduction in the face of those numbers that I have just mentioned. Second area for policy recommendations is the macroeconomic policies. Third one deals with the financial stability.
So let's start with the key objectives, how to create more jobs, how to achieve stronger growth, how to alleviate poverty. You know, there is no single measure that is going to deal with all those issues and this is going to be really an issue of putting all hands on deck in order to address all of them.
We believe that for one, the U.S. should invest in its future. As we emphasize in our statement, the priority is to invest in people and to invest in infrastructure, to encourage innovation and stimulate productivity, and try to get people back in the labor force. But growth in and of itself will not be enough. We also believe that additional measures should be taken to mitigate inequalities.
You've heard me say that on a global basis because it's a factor that applies pretty much across the world. I'm going to now mention some of the measures that we believe will be helpful in the context of the U.S. market.
We recommend targeted policies that help poor families make ends meet. First of all, we recommend an expansion of the Earned Income Tax Credit, the EITC. It's a program that works, that has been around for the last 40 years that is currently restricted to families with children. We certainly recommend that it be expanded beyond the family circle.
To complement the expansion of the EITC we also argue for an increase in the minimum wage which, in the U.S., relative to median wages is among the lowest in advanced economies, 38 percent. So two key measures, expansion of the EITC coupled with an increase in the minimum wage.
Second set of recommendations, they relate to fiscal and monetary policies, and clearly they are there to lay the ground work for growth and jobs that I have just mentioned. Starting with fiscal policy, as we have said before, it remains critically important to adopt and implement a credible medium-term fiscal plan, to bring down debt and secure sustainability.
Now, we say that, we have said that. We will probably continue saying that because we recognize that it's quite difficult to achieve from a political point of view. However, we also acknowledge that there has been progress, clearly demonstrated by last years' passage of the bipartisan Budget Tax Act.
We also see room, provided that there is this medium-term fiscal plan, we see room for some targeted fiscal support today to help lay the foundation for higher growth tomorrow. That includes spending on infrastructure, education, job training programs, and childcare subsidies.
Yet, making room for these important policies requires also getting to grips with long-term drivers of rising debt. This will need to involve controlling healthcare costs, reforming Social Security, as well as improving the tax system which is too complex, has too many write-offs and loop holes, and generates too little revenue.
Finally, I would highlight our recommendations on changes to the fiscal, institutional framework, the goal of which is to try to avoid the recent experience of debt ceiling brinkmanship and government shut downs. That's for the fiscal policies.
Turning to monetary policy, we believe that a gradual path of interest rate normalization is the right approach. Our forecast suggests that the economy will only hit full employment by the end of 2017, and inflationary pressures will stay muted.
Here there is a bit of, well it's a caveat, it's also a bit of an inconsistency between the uncertainty around the outlook, which requires that the Fed be nimble (and it certainly is) while at the same time though, there seems to be a large amount of certainty in markets on where policy rates are going to go.
So in the face of that, we certainly believe that the Fed should continue to deploy clear communications which will be more important than ever. We've made some recommendations in the field of communications, and we believe, notably, that possibly more frequent press conferences by the Chair of the Fed might prove efficient in order to dispel this risk that I just alluded to between the uncertainty on the one hand, and the certainty displayed by markets.
That brings me to my third and final area of policy recommendations which touches on the financial stability. The crisis much be fading, but financial stability risks certainly have not gone away. Indeed, it seems pretty clear that they have gradually built up during the protracted period of exceptionally low interest rates.
The current conjecture of very low market volatility creates, also, the potential for an abrupt shift in financial markets. Now, don't get me wrong, monetary accommodation has been the right thing to do in the wake of the crisis. The challenge now is to minimize the potential side-effect.
Here we believe that the U.S. needs to continue to pay close attention to what is happening outside the banking system in the so called shadow banks, and in other non-bank intermediaries. There activities often fall outside the standard nets of regulation and supervision, and yet, can still be the magnets for excessive risk-taking.
So what do we recommend? We recommend conscientious oversight and a proactive approach. Some of our specific recommendations include supervisory scrutiny on underwriting standards, higher risk weights, and tighter limits on large exposures to certain assets, as well as stronger prudential loans for holding securitized loans by regulated entities.
We also see scope for a larger Federal role in insurance supervision and regulation. While there has been progress in those areas there needs to continue to be such progress.
Let me also point out that we are not working with the U.S. authorities on our next FSAP, Financial Stability Assessment Program. It's work that will require a bit of time, and our team will work for the next 12 months so that when we see each other next year, same time, you will have not only the concluding statement of the Article IV, but you will also have the report on the financial stability assessment program.
So in conclusion, we see prospects looking up for the U.S., but we also believe that attention must now turn to the kinds of policies needed to lay the foundation for growth that will be sustainable, that will create jobs, and that will require investing in the long-term, and not being short-sighted as to what is needed from a structural point of view. Both in terms of investment, but also in terms of fiscal approach.
Thank you very much, and I will take a few of your questions, which I see already.
MR. RICE: Thank you very much, Madame Lagarde. Again, may we focus the questions, please on the U.S. today. Let's keep them short. Start with the lady right in the middle. That's you.
QUESTIONER: Thank you, Gerry. Thank you, Madame Lagarde. My question is on the communication system of the Federal Reserve.
You said that the Chairwoman of the Fed should have more press conferences. Now they have, like, four time press conferences after FOMC annually. So what amount do you think is appropriate?
Also, how would you evaluate the communication system, not only inside the United States, I know you wanted to focus on the United States, but how would you evaluate the communication system between the Federal Reserve with other central banks in terms of the changes, the policy, macroeconomic policy? Thank you.
MS. LAGARDE: So your question is two-fold. On the first part of your question you're saying essentially the Fed, today, communicates four times a year and has those heavy duty press conferences. What is our recommendation?
First of all, we would observe that the communication by the Fed is pretty efficient, and needs to continue to be efficient. Give that, what I described as the uncertainty versus certainty, in other words, uncertainty about the outlook, question about, you know, the texture of the labor market, questions about the participation rate, questions about the longer term unemployment, on the one hand, and the certainty that seems to be displayed by markets.
We think that it's really important that the Fed continues to do that. Now, how can it do better as the economy evolves and as the crisis, you know, goes away as monetary policy, clearly, will evolve? We make two recommendations, essentially.
One is that there be more frequent press conferences, and that from four it could move to, you know, gradually, maybe six. That it be as often as required given this discrepancy between the uncertainty and the certainty. As this uncertainty becomes more explainable that the Fed takes the opportunity to explain.
The second thing that we recommend is a monetary policy report. Now, that is often used by monetary institutions that adopt an inflation targeting monetary policy in various places. That is the case in some countries such as the UK, Australia, New Zealand. It could be considered.
I'm not suggesting that it be implemented right away because the Fed is clearly a long-standing institution with its particularities, and that has to be respected as well. But those are the two areas, the more frequent press conferences being, you know, privileged over the other one.
Now, you asked me about the sort of inter-central banks’ communication. There I believe that whether it's on the occasion of the BIS meetings, on the occasions of some of the G-20 meetings, and so on and so forth, central banks actually meet on a regular basis. They don't necessarily comment for you the scope, depth, and frequency of their meetings, but they do meet.
I'm certainly reassured for having talked to many of those central bankers that that communication is increasing and improving because there is a wider recognition of the spillover effects, and the potential spill backs to the various territories where monetary policies are decided.
MR. RICE: Gentleman to the right here. Yes, sir.
QUESTIONER: Madame Managing Director, the Bank of England Governor Mark Carney recently warned that in the UK interest rates may need to rise earlier than markets currently expect. Do you see a similar risk in the U.S.? If not, why not given that the two economies have followed fairly similar paths in the wake of the crisis? Thank you.
MS. LAGARDE: You know, the market assessments is generally that once tapering will have been completed to the point where there will no longer be purchases then tightening might, in short order, take place. We're not that certain about the short order.
Our assessment, given particularly the forecast on unemployment and employment numbers, and the halo of uncertainty around those numbers coupled with the fact that we believe that inflation will remain under target for a period of time. We don't see that short order to be much before 2015, let's put it that way.
I would also observe, probably, that the pickup in the economy, the pickup in the U.S. economy is not as strong as it seems to be in the UK economy. So that's an additional factor.
MR. RICE: Yes. Lady right here.
QUESTIONER: Just to follow-up on this question, so can you give us any more indication on when the IMF thinks rates could be appropriately at zero? What do you think the markets are not understanding in the Fed communication or is it on the Fed that's not communicating it right?
MS. LAGARDE: No, I want to dispel the idea that we would be arguing that the Fed is not communicating right. We believe that the Fed is communicating rightly.
What we are saying is that it could consider to communicate more frequently as the economy picks up, as the markets move in the direction they seem to be moving in order to really clarify the uncertainty surrounding unemployment numbers, inflation numbers, core inflation numbers, and its forecast for growth.
So it's not, you know, we're not saying it's not communicating right. We're saying it is communicating right, but what we're saying is that as uncertainty fades away, hopefully, it will be even more important for the Fed to communicate rightly. We suggest maybe a bit more frequently in order to explain very clearly its monetary policy going forward.
As to figuring out the tea leaves of the market reactions I don't think that I could actually do that competently.
QUESTIONER: My first question was about the...
MS. LAGARDE: As I said, you know, we don't have a fixed date. We don't think that it would necessarily be in short order after the end of the tapering programs. That's what we assess.
Do you want to add to that Nigel or Alejandro?
MR. CHALK: So we make an assumption in our forecast that the Fed, pretty much along the lines of the market, that the Fed would liftoff around mid '15 and move very slowly after that. But as the Managing Director said, in our forecast we also have inflation well below target right through until 2017, and we also have a relatively high level of unemployment, and a lot of slack left in the labor market.
MR. RICE: Yes, sir.
QUESTIONER: Madame Lagarde, firstly, the most important question. The U.S. is facing off against Ghana today who are you supporting in the World Cup for that game, and broader favoring for the larger tournament?
Secondly, what are the consequences to the U.S. and global economy if the Fed moves in line with market expectations instead of your prognosis or recommendation for a slower exit? Especially in light of the financial risk you outlined.
MS. LAGARDE: I would really guard against any prognostic concerning soccer or what I call football. I was delighted to see that the French team did as it did yesterday, and good luck to all teams.
Now, it's really difficult to speculate about what is likely to happen that we don't think will happen. But clearly, you know, earlier than timely tightening could possibly, you know, have consequences on the U.S. economy, in the first place, and could possibly, you know, constrain and restrict the recovery momentum that we have observed, and would not be, you know, positive from an employment point of view.
Second, could we also have more severe consequences in terms of global economic outlook where the spillover to emerging markets would leave a mark on their respective growth. So it's from that, sort of, two-fold perspective that we would be looking at it.
MR. RICE: Lady right here.
QUESTIONER: Thank you. In the report, the U.S. growth prospects have been lowered substantially from 2.8 to 2 percent. To what extent will the downgrade affect the rest of the world, especially emerging markets like China? Thank you.
MS. LAGARDE: As I said, we have revised downwards, probably conservatively, but essentially on the basis of this very low and unexpectedly low Q1. We haven't seen the final number, by the way, of Q1. Given the weight in the annual growth number of any first quarter.
But I think our key message is that we see this as temporary and we see numbers going forward in quarter 2, 3, hopefully 4, as being a lot stronger and trending around 3 percent. So yes, there will be spillover to other markets to the extent that, you know, there are strong interconnections, but I wouldn't over emphasize them given the temporary nature of this bad number in Q1.
MR. RICE: Yes, sir.
QUESTIONER: Hello. I have a question on the minimum wage. Where do you see the adequate level of minimum wage? Don't you think that this increase is already doomed in events by the political gridlock in Washington? Thank you.
MS. LAGARDE: We believe that the increase in the minimum wage would be helpful, particularly if coupled with an increase in the EITC. So it's the two together that we believe would be very helpful.
When we look at the number where it is today it's clearly within the three lowest, relative to median wage, in all of the OECD countries at 38 percent of the median wage. Given the other numbers that I've mentioned, the 50 million Americans living below poverty levels, and the number of unemployed people, we believe that an increase of that minimum wage would be helpful from a macroeconomic point of view.
We're talking about significant numbers. You know, when you have 50 million people living below poverty level, many of whom are actually working people, not people who are just not doing anything. That's why we are recommending it.
Now, as to give you a number, is it $10.10? This is something that needs to be decided by the legislators, clearly. But I would also observe that there are states in which minimum levels have been raised to try to reduce those poverty levels.
MR. RICE: Thank you. Gentleman in the front.
QUESTIONER: Good morning. The statement doesn't mention the ongoing unwillingness of the U.S. authorities to support and implement the IMF reforms. Have you given up hope on this?
MS. LAGARDE: No way, no way. I would never give up, never give up. You know, I was a player in this organization except on the other side when the U.S. authorities campaigned actively for the reform and I want to see it through.
So I would certainly hope that the authorities both at the administration as well as at the legislative level understand and appreciate how helpful and necessary it is to actually implement the reform, so that the IMF can continue to play its role as prescribed by the articles.
MR. RICE: Okay. I’m looking for other questions.
QUESTIONER: I have an international question. I don't have an American question, if possible. Madame Lagarde, according to the Financial Times the IMF discussed a new way for bailouts, according to the paper. The IMF is discussing changes to its rules that could require countries in difficulty to extend maturities on their sovereign debt as a condition of seeking its help. Can you comment on this article?
MS. LAGARDE: Well, you know, it's an ongoing effort that we have undertaken and will continue to undertake in order to improve and fine tune the sovereign debt restructuring range of issues.
You know, it's not just about reprofiling, extending maturity, having this intermediate tool in the tool box. But looking at all of our, you know, a whole range of issues. We will continue to do that. Nothing is neither final nor approved, not ready yet for resolutions to be put to the Board.
It's certainly an area where we need to reach out, talk to all the stakeholders. It's a dialogue that has been ongoing anyway where we need to participate and we need to provide the expertise that we have accumulated over the last 70 years given changing circumstances. So it's, you know, it's hard work. It's highly technical and it needs to be well articulated and also based on informed views around the community from the entire spectrum.
MR. RICE: I think we're into the last two questions, and I see the two gentleman here.
QUESTIONER: Thank you for doing this. Congratulations to all whose teams have won and best wishes to all the rest.
I have sort of a follow-up to that. Speaking of debt, Ukrainians are not paying their gas debts. It was expected. Major shareholders of the IMF pushed this through anyway. What is to be done about this? Thank you.
MS. LAGARDE: Well, as you would expect me to say so, we don't intervene in commercial transactions between corporate entities. You know, both Gazprom and Naftogaz are commercial entities that entertain a commercial relationship.
We certainly hope for the stability of that part of the world and for the stability of the supply of gas that the situation can be addressed promptly and satisfactorily between the commercial entities in the negotiation. Strong hope.
MR. RICE: Thank you. So this is the last question.
QUESTIONER: Madame Director, in the downward revision for growth in 2014 it looks like weather played a big role. What does that tell us about the stability and resilience of the U.S. economy given that outsized impact?
MS. LAGARDE: I think it says two things. One is, we believe that this Q1 result was a temporary occurrence with temporary outcomes that will be mitigated by stronger growth going forward in Q2, Q3, and hopefully ongoing.
However, as you will have noted, we have revised down our forecast for growth trend in the United States to 2 percent. So, you know, we are facing this aging population issues. We are facing this relatively low productivity issues which is why we are recommending various long-term policy reforms to address aging and productivity.
But it tells us another thing which is that extreme weather occurrences have a serious effect on the economy. You know, extreme weather occurrences have repeated much more frequently in the last 20 years then they had in the previous century. I think that's, you know, a valid reason to wonder about climate change and how to deal with it. Incidentally, one of the tax recommendations that we put in this report deals with carbon tax.
MR. RICE: Thank you very much, Madame Lagarde and, okay, Alejandro.
MR. WERNER: Maybe just to compliment on the resilience of the U.S. economy. I mean, it is based on when you look at the household balance sheets. They have strengthened significantly, corporate balance sheets have strengthened significantly. The important redaction in the fiscal drag are the underpinnings of why… we're expecting in the next three quarters for growth to pick up after this.
As the Managing Director said, obviously, for the medium-term once the output gap closes our concerns are on the structural issues and the important issues of having the U.S. economy at around 2 percent for the long term.
MR. RICE: Thank you, Alejandro, and thanks to everyone here. Thanks to you for coming.
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