Transcript of a Press Conference on the Concluding Statement of the United States IV Consultation
IMF News, June 14, 2013
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- Published: June 14, 2013
Outlook
- Recovery in the United States "is gaining ground and becoming more durable."
- Housing market, household balance sheets, and labor markets "are generally doing better."
- Private sector is leading; "easy financial conditions have helped."
- Key headline projections and figures:
- Unemployment is "still too high at about 7.6 percent."
- "We expect growth this year to be at 1.9 percent."
- "The deficit will likely decline by 2.5 percent."
- That deficit decline "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."
- Conditions that would support 2.7 percent growth next year:
- "Fiscal adjustment becoming more moderate"
- "The housing market continuing to strengthen"
- "Continued support for monetary policy"
Risks (external and domestic)
- External risk:
- "Possible renewed financial stress on the markets, notably coming from the Euro area, which would affect the United States."
- Domestic risks (emphasized as "closer to home"):
- "Too strong deficit decline" — sequester and other deficit reduction measures could have a "stronger-than-expected impact."
- "Doing too little further down the road after having done too much this year."
- Additional macro risks noted:
- Sequencing risks from "the phasing out from the extraordinary degree of monetary policy stimulus."
- Challenges for financial stability during the unwinding of monetary accommodation.
- Market volatility related to expectations about monetary policy (including recent volatility in emerging markets and U.S. Treasury rates).
Fiscal policy assessment and recommendations
- Short-term vs. medium-term framing: "slow down, but hurry up" / "hasten slowly."
- Short-term recommendation:
- "Slow the adjustment this year."
- Example: "repeal the sequester and adopt a more balanced and gradual pace of fiscal consolidation."
- Replace sequester cuts with "a better balanced program with a mix of back-loaded entitlement savings and new revenues."
- Immediate operational advice:
- "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."
- Medium-term recommendation ("hurry up" on a roadmap):
- Put in place "a medium term road map to restore long-run fiscal sustainability."
- Rationale: projected "significant increase of interest outlays" and likely "significant increases in health care costs" over the next five years.
- Quantified medium-term risks:
- "Additional interest outlays would be in the range of 2 percent of GDP"
- "Additional health care costs would likely be in the range of 2 percent of GDP"
- Preferred design: "a comprehensive and back loaded plan with both lower growth in entitlement spending and higher revenue."
- Specific entitlement policy options discussed:
- Pension reforms: indexing changes (e.g., "chained CPI") and raising eligibility/retirement age for Social Security benefits.
- Health care: "phasing out some of the tax benefits that accrue to the high end health care plans" and other measures to "help contain the rate of growth of health care costs."
Monetary policy, exit sequencing, and communication
- Assessment of current stance:
- No need to rush exit from monetary accommodation given "the still large output gap," "subdued growth," and "well-anchored inflation expectations."
- Policy tools and implementation:
- "The Fed has a large range of tools that it can use," including "effective communication" and "careful timing."
- Communication is highlighted repeatedly as a critical tool to "reduce uncertainty" and manage expectations domestically and for spillovers abroad.
- Forecast assumptions on asset purchases:
- Assumption used for forecasts: "$85 billion in bond purchase a month until the end of this year."
- For 2014: "a slight, very slight decline. No tightening, very slight decline." — described as "very gradual phasing out later in 2014, depending on circumstances."
- Caution on market reactions:
- Recent market volatility is described as a return to different circumstances after a period of low volatility; unwinding will be "with us, you know, over months and months and months."
Financial sector reform recommendations
- Continue and complete reforms in several areas, including:
- "Regulation of money market funds, as recently proposed by the SEC"
- "Basel III total implementation"
- "The Volcker rules"
- Rationale:
- These reforms "are particularly significant, given the global major role played by the U.S. financial market."
- Reforms "should be well coordinated with the global financial reform agenda that is underway."
Housing market policy options
- Existing programs highlighted:
- HAMP (Home Affordable Modification Program) — "recently extended" and "helping underwater borrowers get more affordable mortgages."
- HARP — "eased access to refinancing for households that have been current on their mortgages" but constrained to mortgages guaranteed by GSEs (Fannie Mae and Freddie Mac).
- Policy options to deepen recovery:
- Extend refinancing programs beyond mortgages guaranteed by Fannie Mae and Freddie Mac — requires legislative action; described as "something that the administration has proposed."
- "Expeditiously completing all the regulatory reforms that have to do with the housing finance sector" to bring product capital back in and provide certainty to financial institutions.
Forecast revisions and assumptions
- April forecast comparison:
- April forecast for 2014 was "3 percent"; the updated forecast is "2.7 percent."
- Explanation: the downgrade reflects that the current forecast "does not assume that sequestration will be phased out" (sequestration assumed to continue).
- Clarification of QE/assumption link: forecasts use the assumption of "85 billion monthly purchases until the end of this year" with "very gradual phasing out later in 2014" contingent on labor market and inflation developments.
Other topics addressed briefly
- Troika/Euro area cooperation:
- Troika relationship described as "very unusual and exceptional" but "a solid cooperation, constant cooperation."
- Regular contact noted between IMF Managing Director and European counterparts (example: "not a week that goes by without Olli Rehn and myself speaking on the telephone").
- Energy and geopolitical risk:
- Rising tensions in the Middle East raise the risk of higher oil prices, which are a macro risk.
- Assessment for the U.S.: "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" — concluding that the U.S. is "probably better protected against that risk than it was, than many other economies."
- Institutional reform comment:
- Managing Director noted President Putin's interest in IMF reform consistent with "the 2010 governance reform calls for."
Transcript of a Press Conference on the Concluding Statement of the United States IV Consultation — June 14, 2013