Just a month after releasing the annual report on the U.S. economy, the International Monetary Fund downgraded the 2014 growth estimate to 1.7% from the 2.0% previously forecast, which itself was revised from 2.8% in April, due to the weak first quarter result, an IMF official said Wednesday.
In keeping with usual practice, the IMF releases the so-called Article IV review in staggered fashion: first the concluding statement following meetings with the government, released June 16 and included a press conference by IMF Managing Director Christine Lagarde; followed by the full staff report, released Wednesday after the IMF board meets to discuss it.
But it is very rare to have a forecast change in between those two events. (It is up to each country whether and when these reports are made public.)
Nigel Chalk, deputy director of the IMF Western Hemisphere Department told reporters in a conference call that the final first quarter GDP data – released June 25 and showing a 2.9% contraction – caused the downgrade and unlike some forecasters the IMF does not expect that to be reversed in the second half.
However, Chalk said that “behind that relatively pessimistic number we have a more optimistic view of the economy going forward,” which is reflected in recent data, including forecast for 3.0% growth in 2015 and 2016, “the highest in quite some time.”
Even so, “we still see that there is a lot of slack in the economy, and so we believe that an accommodative stance for monetary policy continues to be the right choice, and we’re supportive of that choice by the Federal Reserve,” he said.
As MNI reported June 16, the IMF report said because it will take time for the U.S. unemployment rate to come down and inflation pressures are expected to remain muted, “there is some scope for policy rates to stay at zero for longer while still keeping inflation under 2 percent.”
Chalk explained Wednesday that the IMF growth outlook is somewhat lower than reflected in the Fed’s Summary of Economic Projections – which he stressed is not the same as majority view – so “we have a rate path below that path, with take off in mid-2015 and we implicitly assume a rate move every other meeting, which we think is consistent with what was communicated by the Fed.”
The report cautions that even if rates stay at zero, the Fed will have to watch wage pressures – so far not evident – and financial instability issues.
“We’re paid to worry so yes we are concerned that there is a significant potential that a long period of low interest rates do create incentives for search for yield, investment in more risky assets,” Chalk said, but right now “I would characterize it as pockets of vulnerability within the system, but not systemic financial risk.”
And those pockets “can be can be managed through prudential measures and regulatory measures and supervisory measures without a monetary policy response,” he said, although “certainly one eye should be kept on the financial stability risks.”
He noted that the IMF has recommended the Fed improve communication, including on the issue of what is the majority view, what is the dissenting view and the weight of the “dots” on the Fed’s chart of projections, as there is some confusion about that.
In addition, although the Fed “has reiterated repeatedly that there is a lot of uncertainty about what policy might be going forward” when you look at financial markets, and talk to participants, “there seems to be an awful lot of certainty about what the path of policy might be.”
He warned that, “This creates a potential where people will be surprised because pricing in market is out of line with fundamentals” and there could be disruptions when it comes time for repricing if the economy fails to evolve in line with the central forecast “and that might be disruptive.”
In a departure for most reports on advanced economies, the IMF this time focused a lot of attention on poverty reduction in the U.S. economy due to its impact on long-term growth prospects. It calls for an increase in the minimum wage, expansion of the earned-income tax credit, as well as measures such as child care subsidies to allow workers to rejoin the work force.
Immigration reform also is called because of the potential economic impact, along with investment in research and development, infrastructure and incentives to firms hiring long-term unemployed.
Discussion of these issues, while perhaps influenced by their prevalence in the national debate at the moment, are selected by IMF staff not due to any suggestions from the current administration which favors those policies, Chalk said.