## 2014 Article IV Consultation with the United States of America Concluding Statement of the IMF Mission

_IMF News, June 16, 2014_

## Source details

**Canonical URL:** [2014 Article IV Consultation with the United States of America Concluding Statement of the IMF Mission](https://www.imf.org/en/news/articles/2015/09/28/04/52/mcs061614)

## Other formats

- [Markdown version](/en/news/articles/2015/09/28/04/52/mcs061614/index.md)
- [Structured JSON version](/en/news/articles/2015/09/28/04/52/mcs061614/index.json)
- [Bundle manifest](/en/news/articles/2015/09/28/04/52/mcs061614/bundle-manifest.json)

## Bibliographic details
- Published: June 16, 2014

---

### Key themes and overall policy focus
- Five broad themes to strengthen the recovery and improve the long-term outlook: raising productivity growth and labor participation; confronting poverty; keeping public debt on a sustained downward path; managing the exit from zero policy rates; and securing a safer financial system.
- Policy focus recommended: undertake more proactive labor market policies to lower long-term unemployment and raise participation; increase the minimum wage while strengthening the Earned Income Tax Credit; invest in infrastructure; improve the tax structure and raise revenues; fundamentally reform social security; and lower the growth of health care costs.

### Growth and poverty reduction
- Near-term growth and jobs:
  - Growth projected at 2 percent for 2014, rising to 3 percent in 2015.
  - Recent factors that weakened early-2014 momentum: a harsh winter, inventory drawdown, a still-struggling housing market, and slower external demand; recent data suggest a meaningful rebound underway.
  - Current account deficit expected to slowly widen as imports rise, only partially offset by fiscal consolidation and energy self-sufficiency improvements.
  - Labor market: job growth healthy but weaker beneath the surface—long-term unemployment high, labor force participation well below what demographic factors explain, and wages stagnant.
  - Headline unemployment expected to decline only slowly as improving prospects draw discouraged workers back into the labor force; long-term unemployment will take time to fall to historic levels.
- Longer-run growth:
  - Potential growth forecast to average around 2 percent for the next several years.
  - Downward pressures include population aging and more modest productivity prospects.
  - Recommended measures: investments in infrastructure and education; improving the tax system; active labor market policies; potential skills-based immigration reform; capitalizing on rising U.S. energy independence (including removing existing restrictions on U.S. oil exports).
- Poverty:
  - Latest data showed almost 50 million Americans living in poverty (Census Bureau’s supplemental poverty measure).
  - Official poverty rate stuck above 15 percent despite the recovery.
  - Policy measures to reduce poverty: stronger growth and job creation; expanded Medicaid and increased health insurance coverage; expanded Earned Income Tax Credit (apply to households without children, older workers, and low income youth); make permanent EITC extensions and Child Tax Credit improvements due to expire in 2017; increase the minimum wage.

### Macroeconomic and financial policies
- Macroeconomic policy mix:
  - With substantial economic slack, strong case for continued policy support.
  - Ideal approach: approve and implement a credible medium-term fiscal consolidation plan to provide flexibility for near-term fiscal support focused on productivity, capital stock, and labor supply—allowing earlier withdrawal of exceptional monetary stimulus and reducing financial stability risks.
  - Political agreement on this approach remains elusive.
- Monetary policy stance:
  - Fed faces uncertainty about remaining labor market slack, transmission of slack to wages and prices, and transmission of future rate increases to the real economy.
  - Staff baseline: economy expected to reach full employment only by end-2017 and inflationary pressures expected to remain muted.
  - If baseline holds, policy rates could stay at zero for longer than the mid-2015 date currently foreseen by markets, but policy must remain cognizant of financial stability risks.
  - If inflation rises more rapidly while the economy is still below full employment, tolerating a modest, temporary rise of inflation above the longer-term goal could be consistent with the Fed’s balanced approach, provided inflation expectations remain anchored and financial stability risks are low.
- Federal Reserve communication:
  - Recent shift to qualitative forward guidance increases flexibility but raises the premium on clear, systematic communication.
  - Suggested enhancements: schedule press conferences by the Fed Chair after each FOMC meeting; publish a quarterly monetary policy report endorsed by the FOMC conveying majority views, uncertainties, and dissenting views; provide greater clarity on how financial stability considerations factor into monetary policy.
- Financial stability risks:
  - Progress: banks stronger, corporate balance sheets healthy, overall leverage contained, regulatory framework improved.
  - Ongoing concerns due to prolonged very low interest rates, especially in nonbank intermediaries:
    - The growing amount of maturity and liquidity transformation through mutual funds or exchange traded funds, particularly those investing in credit instruments;
    - The ongoing weakening of underwriting standards in some areas, particularly those linked to lending to leveraged corporations with higher credit risks;
    - The volume of flows searching for returns and flowing into higher credit risk and longer duration assets;
    - The uncertain leverage and risks embedded in securities lending undertaken by large financial institutions;
    - The fragmented oversight of the insurance sector, data gaps, and the lack of a consolidated picture of insurance companies’ global activities and risks;
    - A decline in broker-dealer involvement in market making activity, potentially hampering market functioning and price discovery at times of stress.
  - Tail-risk scenario: a precipitous investor exit—exacerbated by outflows from ETFs and mutual funds and near-term market illiquidity—could trigger abrupt, self-reinforcing re-pricing of financial assets, damaging U.S. growth (via wealth effects and financing strains) and causing international knock-on effects.
- Regulatory action recommended:
  - Further supervisory scrutiny on underwriting standards.
  - Higher risk weights and tighter limits on large exposures to certain assets (such as leveraged loans or high yield bonds).
  - Stronger prudential norms for holding securitized loans (such as CLOs) by regulated entities.
  - Address vulnerabilities of money market funds and the tri-party repo market.
  - Continue implementing measures for orderly resolution of too-important-to-fail institutions and deepen cross-border resolution cooperation.
  - Insurance sector: stronger and more uniform capital adequacy and solvency oversight, refine/harmonize stress testing, close data gaps, designate additional systemically important firms, and consider a larger federal role in insurance regulation and oversight.
  - U.S. should lead in advancing global regulatory reform to ensure common practices, limit regulatory arbitrage, and remain attuned to international spillovers.

### Housing finance
- Mortgage finance constraints:
  - Limited availability of mortgage financing is a pressing constraint on growth.
  - Conservative lending driven by “put-back” risk, litigation and reputational risks, a tighter regulatory environment, and uncertainty about the mortgage industry’s future structure.
  - Measures already taken: “safe harbor” for Qualified Mortgages and clarifications on put-back conditions.
  - Recovery of mortgage lending to lower credit-rated borrowers likely to be slow.
- End objectives for housing finance reform:
  - A substantial first-loss risk borne by private capital (rather than taxpayers);
  - An explicit public backstop limited to catastrophic credit losses with risk-based guarantee fees;
  - A role for regulatory agencies in setting underwriting standards;
  - A common platform for securitization;
  - Clear delineation and transparent accounting of public interventions intended to promote social objectives.
- Interim administrative actions (in anticipation of legislative reform):
  - Expand market transactions to transfer first-loss risks from the agencies to private investors;
  - Move gradually to higher and more risk-based guarantee fees;
  - Steadily build up capital within the agencies while reducing their role in housing finance;
  - Establish a single securitization platform.

### Fiscal policy: near-term, medium-term, and institutional reforms
- Near-term fiscal policy:
  - Bipartisan Budget Act (December 2013) and raising the debt ceiling reduced fiscal risks.
  - Room exists to expand the near-term budget envelope funded by offsetting savings in future years.
  - Specific near-term measures supported (many in the Administration’s budget proposal):
    - Front-loaded infrastructure spending, with urgency on surface transportation and clarity on financing the Highway Trust Fund; sustained Federal and State increases paid for by entitlement savings, additional revenues, and expanded financing sources (including innovations such as the America Fast Forward Bond).
    - Changes in the tax system: limit or gradually eliminate itemized deductions for the individual income tax (including the mortgage interest deduction); significantly increase the Federal gas tax; reinstate and make permanent the Research and Experimentation tax credit that expired at end-2013; consider time-bound tax credits or wage subsidies to employers who hire the long-term unemployed.
    - Education spending reoriented to prioritize early childhood education (including universal pre-K) and greater support to science, technology, engineering and math programs.
- Medium-term consolidation:
  - General government debt not on a sustainable longer-term path and likely to begin rising again by 2018.
  - To place debt on a downward trajectory, staff believe a general government primary surplus of 1¼ percent of GDP by 2023 will be needed.
  - Adjustment measures should include:
    - Controlling health care costs through better coordination of services for chronic conditions, greater cost sharing with beneficiaries, and limiting tax breaks for higher cost, employer-provided health plans.
    - Strengthening social security finances via fundamental reform: further gradual increases in the retirement age (perhaps linked to life expectancy), increasing the ceiling on taxable earnings for social security, and indexing benefits and tax provisions to chained CPI.
    - Improving the tax structure and raising revenues: broad corporate tax reform to lower the marginal rate, simplify the system, eliminate exclusions and deductions, limit base erosion and profit shifting; introduce a broad-based carbon tax; move toward a Federal-level VAT.
- Institutional fiscal reforms:
  - Recommendations to lessen fiscal policy uncertainty and avoid brinkmanship:
    - Reach bipartisan agreement on a clear, simple medium-term fiscal objective with an integrated view of budget functions and numerical targets for debt and deficit;
    - Adopt mechanisms to trigger revenue or spending adjustments if targets are breached;
    - Implement an automatic process that raises the debt ceiling once agreement on broad budget parameters is reached;
    - Shift to a budget cycle where annual spending levels are agreed for a two year period, with specified conditions for supplemental resolutions.

### Conclusion
- The agenda ahead is long and challenging and will take many years to accomplish.
- Concerted progress would raise long-run growth prospects, lessen poverty, put fiscal finances on a sustainable footing, and reduce financial stability risks—beneficial for the U.S. and the world economy.

*Source: Mission Concluding Statement, 2014 Article IV Consultation with the United States of America, June 16, 2014.*

---

## Content in this bundle

- [061614cpdf (PDF)](/-/media/websites/imf/imported/external/chinese/np/ms/2014/061614cpdf.pdf){rel="external" type="application/pdf"}

---

## References

- [United States and the IMF](http://www.imf.org/external/country/USA/index.htm)
- [Mission Concluding Statements](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [Article IV](https://www.imf.org/external/pubs/ft/aa/aa04.htm)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/52/mcs061614_