## U.S. Economy Returning to Growth, but With Pockets of Vulnerability

_IMF Blog, June 4, 2015_

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**Canonical URL:** [U.S. Economy Returning to Growth, but With Pockets of Vulnerability](https://www.imf.org/en/blogs/articles/2015/06/04/u-s-economy-returning-to-growth-but-pockets-of-vulnerability)

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## Bibliographic details
- Authors: Christine Lagarde
- Published: June 4, 2015

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### Context and overview
- Author: Christine Lagarde
- Date: June 4, 2015
- IMF staff completed their annual health check of the U.S. economy and a Financial Sector Assessment Program (FSAP) for the United States.
- Focus of review: financial stability risks, policies to mitigate them, movements in the U.S. dollar, and the timing, form, and impact of interest rate normalization by the Federal Reserve.
- A more detailed report on the U.S. economy and on the financial sector will be available on July 8.

### Economic outlook — findings and projections
- Growth forecast for 2015 revised down to 2.5 percent, largely due to factors affecting the first quarter.
- Labor market: job growth has averaged about 250,000 per month over the last year.
- Near-term growth drivers:
  - Cheaper oil prices expected to boost consumption in the remainder of 2015.
  - Lower oil prices will continue to reduce oil-related investment, as observed in the first quarter.
- Risks to the outlook:
  - Further delay of the housing recovery.
  - Strong dollar could drag on future growth despite recent improvement in the trade balance.
- Medium-term and short-term growth expectations:
  - Growth in the coming quarters is expected to be 3 percent or higher.
  - Forecasts of potential growth are now around 2 percent (compared with over 3 percent average growth rates before the Great Recession).
- Inflation outlook:
  - Inflation pressures seen as muted due to long-term unemployment and high levels of part-time work indicating employment slack.
  - Wage indicators have shown only tepid growth.
  - With dollar appreciation and cheaper energy costs, inflation is expected to start rising later in the year, but only slowly, reaching the Federal Reserve’s 2 percent medium-term objective by mid 2017.

### Monetary policy — assessment and recommendations
- The Fed’s first rate increase in almost 9 years is being carefully prepared and telegraphed.
- Risks of higher U.S. policy rates:
  - Could result in significant market volatility with financial stability consequences beyond U.S. borders.
- Recommendation on timing and path:
  - There is a case for waiting to raise rates until there are more tangible signs of wage or price inflation than currently evident.
  - Even after the first rate increase, a gradual rise in the federal funds rate will likely be appropriate.
  - Such a path may create a modest and temporary rise of inflation above the Fed’s medium-term goal—perhaps up toward 2½ percent.
  - A cautious and gradual approach to interest rate normalization would provide valuable insurance against the risk of disinflation and needing to cut rates back to zero.
- Communication:
  - Continued clear and effective communication by the Fed is critical in the coming months.
  - Previous recommendations include scheduling press conferences after each FOMC meeting and publishing a quarterly monetary report; these merit consideration despite difficulties with adding more communication.

### Financial stability — assessment and key vulnerabilities
- FSAP findings: Much has been done to strengthen the U.S. financial system; important to avoid rolling back legislative advances such as those in the Dodd Frank Act.
- Current system condition: Data point toward a system with pockets of vulnerabilities rather than broad-based excesses.
- Key concerns identified:
  - Migration of intermediation to “shadow banks.”
  - Potential for insufficient liquidity in a range of fixed income markets, particularly under stress.
- The U.S. authorities are investing heavily in understanding and assessing these issues.

### Financial stability — policy recommendations
- Give all individual Financial Stability Oversight Committee (FSOC) members an explicit financial stability mandate to strengthen FSOC effectiveness.
- Undertake a concerted effort to provide the FSOC and the Office of Financial Research with the data they need to build a comprehensive view and analysis of systemic risks.
- Update the regulatory regime in the insurance sector to create an independent and well-resourced body with a nationwide remit.

### Fiscal policies — challenges and priorities
- Given the forecast of a steady rise in the public-debt-to-GDP ratio, it remains critically important to adopt and implement a credible medium-term fiscal plan.
- Required actions include:
  - Tax reform.
  - Social security reform.
  - Steps to contain healthcare costs.
- Fiscal consolidation would provide scope to expand the near-term budget envelope for growth-supporting measures.
- Priority near-term public investment and policy actions:
  - Infrastructure spending.
  - Better education spending.
  - Policies that raise labor force participation, including subsidized childcare assistance.

### Conclusions and policy stance
- Near-term U.S. growth prospects are good.
- It is better to wait for stronger signs of inflation pressures and have an interest rate hike in the first half of 2016.
- Even after the initial rate increase, a gradual rise in the federal funds rate will likely be appropriate.
- Although important progress has been made to strengthen the U.S. financial system, more work is needed to address pockets of vulnerability.

*Source: IMF blog post "U.S. Economy Returning to Growth, but With Pockets of Vulnerability" (Christine Lagarde, June 4, 2015).*

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## References

- [concluding statement](http://www.imf.org/external/np/ms/2015/060415.htm)

_Source: https://www.imf.org/en/blogs/articles/2015/06/04/u-s-economy-returning-to-growth-but-pockets-of-vulnerability_