We thank the U.S. mission team, led by Mr. Chalk and Ms. Weber, for their policy advice and informative analysis. We broadly share staff’s assessment of the U.S. economy.
We agree with staff that the United States economy has proven resilient to a range of external and domestic challenges in the wake of the COVID crisis and the spillovers from Russia’s unlawful invasion of Ukraine. While growth is slowing, aggregate demand – supported by healthy household balance sheets and a strong labor market – remains robust. The Administration’s policies have supported important developments in the U.S. labor market, including a recovery in labor force participation and historic gains for women and African Americans. Real GDP per capita is at an all-time high.
Looking ahead, our key near-term priority is to bring inflation down further and ensure price stability, while pursuing an economic agenda aimed squarely at boosting the productive capacity of the U.S. economy. We continue to see a possible path to lower inflation while maintaining a strong labor market. The Federal Reserve has tightened monetary policy substantially, and the Administration has worked in parallel to ease supply chain bottlenecks, phase out pandemic fiscal support measures, support a green transition, and invest in science and technology. This agenda will support the medium- and long-term growth of the U.S. economy with ambitious investments in infrastructure, clean energy, and globally important technologies and manufacturing inputs such as semiconductors. These investments will also have important positive global spillovers. We also remain vigilant to risks to the financial sector and stand ready to take further decisive action to secure financial stability as needed.
Monetary Policy
The Federal Reserve remains committed to restoring inflation to its 2 percent target and to keeping inflation expectations well anchored. The Federal Reserve has increased its policy rate by 5 percentage points in a little more than a year. The shift toward a stance of monetary policy that is sufficiently restrictive to achieve its inflation objective over time has been well and carefully communicated. Future decisions on the path of monetary policy will remain data dependent in order to determine the extent to which additional policy firming may be appropriate, taking into account the cumulative tightening of policy, the lagged effects with which monetary policy affects economic activity and inflation, and economic and financial developments. The Federal Reserve will continue to use its communication tools to make sure that its policy intentions are well understood by the public, market participants, and by international counterparts.
Reducing inflation will likely require a period of below trend growth and some softening in the labor market. Tighter monetary policy is reducing aggregate demand, though the full effects of this tightening on lending, economic activity, employment, and, ultimately, inflation have yet to be fully realized. In this regard, we agree with staff’s baseline assessment. We acknowledge the range of uncertainty surrounding the central path of the economy, while underscoring that solid fundamentals and a more optimistic outlook than last year should help to achieve this baseline forecast. Like staff, the Federal Reserve also sees risks of a more extensive tightening of credit than currently envisioned in the baseline forecast as well as the possibility of higher and more persistent inflation. In particular, sticky inflation in areas like non-shelter core services deserve close monitoring.
Fiscal Policy
We see the current federal fiscal stance as appropriate. The President’s FY 2024 Budget further phases out COVID-related stimulus measures and adopts measures to support disinflation, ease supply constraints and bolster high return investments that will increase medium-term growth, foster innovation, and support the green transition. As staff welcome and highlight, the President’s Budget proposes additional measures to further address supply-side constraints, including incentivizing labor force participation. Following two years of fiscal contraction, the Administration remains committed to federal deficit reduction; the President’s Budget proposes to reduce deficits by nearly $3 trillion dollars over 10 years, supported by growth-friendly investments and improvements in the fairness of our tax system. The Administration will continue to focus on bringing down the costs of particular goods and services, including medical costs, prescription drugs, and healthcare, as well as pursuing further measures to boost labor supply including through improving child, elder, and family care options, in line with staff advice. For example, the Chips and Science Act includes provisions that incentivize the provision of childcare at facilities that benefit from federal funding.
As highlighted by staff, U.S. fiscal policies are underpinned by a historic trifecta of legislation that include important supply side fiscal measures. The Bipartisan Infrastructure Law, with 32,000 projects already underway, is supporting a modernization of U.S. infrastructure including transportation, water systems, energy grids, and other critical infrastructure to support economic activity and growth. The Chips and Science Act will support revitalized manufacturing, encourage resilience and diversification of supply chains, and make investments in research and development, science and technology, and workforce training. The Inflation Reduction Act (IRA) is playing a key role in helping the United States build a clean energy economy, lower energy costs, tackle climate change, and reduce harmful pollution. These investments are intended to address medium-and-long term challenges, including further upgrading our infrastructure and meeting our climate objectives. Crucially, these legislative packages are designed and will be implemented inclusively, including by providing opportunities to further boost female labor force participation and continue the Administration’s priority to invest in underserved and low-income communities.
The Administration remains committed to building a fair and stable tax system that is more equitable and efficient. This includes making important investments in modernizing the Internal Revenue Service to close the tax gap. The Administration remains committed to taking the additional steps needed to implement the agreement on a global minimum tax. Implementing this international tax agreement will level the playing field and raise revenues to the benefit of all people in the United States and around the world. We welcome the recent approval of a two-year debt limit deal, removing an important source of uncertainty to the economic outlook. We expect higher GDP growth in the medium term, supported by the Administration’s investments, to further bring down the debt-to-GDP ratio.
Financial Stability
The U.S. financial system as a whole remains sound, supported by high levels of capital and liquidity and a stronger foundation than before the Global Financial Crisis began in 2008. In recent months weaknesses have surfaced in some regional banks, but decisive action has helped to strengthen public confidence in the banking system after the failures of three regional institutions due to institution-specific factors. In response to these failures, the Federal Reserve issued a report in late April outlining key takeaways and recommendations to address rules and supervisory practices. We remain vigilant to other ongoing challenges, including those stemming from developments in certain sectors like the commercial real estate market as well as risks in nonbank financial institutions. Our authorities are also seeking ways to mitigate potential risks associated with digital assets, and recent crypto-related failures deserve close and continued monitoring. The Financial Stability Oversight Council (FSOC) continues to take a well-coordinated approach to addressing these financial stability risks.
The Inter-Agency Working Group on Treasury Market Surveillance issued a progress report in November 2022 providing an update on the wide range of significant steps its members have taken to enhance the resilience of the U.S. Treasury market. This includes a number of proposed rules, which staff cite in the report, such as central clearing, as well as past steps, particularly the Federal Reserve’s establishment of standing repurchase agreement facilities. Consistent with the 1948 Administrative Procedures Act, all U.S. regulations are subject to transparent notice and comment procedures, which build in time for engagement with a broad range of stakeholders before proposed rules are finalized.
There has also been ongoing work through the FSOC on climate-related financial sector risks. Following the publication of the FSOC’s October 2021 Report on Climate-Related Financial Risk, the Council established the Climate-related Financial Risk Committee, or CFRC, which is a staff-level committee that serves as an active forum for interagency information sharing, coordination, and capacity building. FSOC member agencies have focused in particular on addressing data gaps and identifying priority data, advancing their collective understanding of scenario analysis, and investigating metrics for risk assessment. The Council also established the Climate-related Financial Risk Advisory Committee, an external advisory committee that will help the Council receive information and analysis on climate-related financial risks from a broad array of stakeholders.
Climate Change
The Administration remains committed to meeting our climate goals, including our Nationally Determined Contribution (NDC) and net-zero commitment, and we underscore the great progress thus far to mainstream climate science into economic policy. We welcome the Fund’s analysis of and attention to U.S. climate change policies. In last year’s United States Article IV discussion, Fund staff, management, and the Executive Board stressed the need for legislation to meet our climate goals. We are pleased that we can now point to the passage of our centerpiece climate legislation. The legislation is the most ambitious climate package in our country’s history and contains critical measures which will help transition the U.S. economy to reduce the bulk of the emissions required to meet our 50-52 percent NDC goal by 2030. The IRA provides long-term clarity and certainty for clean energy project developers to accelerate the deployment of established technologies like wind and solar. It also builds on key investments for carbon capture, utilization and storage, clean hydrogen, reclaiming abandoned mine lands, and upgrades to the national electricity grids under the Bipartisan Infrastructure Law.
Our investments in climate-forward technologies to achieve our climate goals will bring down global prices for these critical technologies, which will have a positive impact for all countries to meet their global climate goals. The IRA is a transparent, focused set of tools to correct a market failure, namely the negative externalities from high emissions, and to mitigate the unacceptable degree of concentration in global clean energy supply chains today. The IRA is also aimed at facilitating an inclusive green transition, with place-based bonus incentives for investments in underserved or at-risk communities. The goals of these investments, including bonus tax incentives, are to increase the adoption of and access to renewable energy in low-income and tribal communities; encourage new market participants in the clean energy economy; and provide social and economic benefits to communities that have often been overlooked and underinvested.
We recognize that additional action is required to meet our climate goals and NDC. The Administration continues to pursue regulatory action, inter-agency initiatives, and new standards, including for power plants and vehicles, to meet these goals. The Administration’s leadership on climate plays a key role to spur further voluntary U.S. private sector climate and sustainability commitments. We also recognize that building clean energy projects in the United States at the speed and scale needed to adequately address the climate crisis requires strategic reforms to improve the way such projects are sited and permitted at the federal, state, and local levels. We expect these efforts, coupled with state and local government action, will fully achieve our climate goals.
International Context
Strong and sustainable economic growth in the United States has and will continue to have positive economic spillovers to the rest of the world. The United States remains committed to supporting developing and low-income countries as they address food and energy insecurity and other spillovers from Russia’s war against Ukraine. We are deepening our partnership with developing countries to help them better integrate into global value chains and reap benefits from trade. Initiatives such as the Partnership for Global Infrastructure and Investment are already helping expand global supply chains to new partners by mobilizing private capital toward quality infrastructure projects in developing countries. In addition to creating diversified and resilient supply chains, our trade policy focuses on mobilizing public and private investment for a clean energy transition and sustainable economic growth; creating good jobs; stemming inequality; ensuring trust, safety, and openness in digital infrastructure; enhancing labor and environment protections; addressing non-market policies and practices; and combatting corruption. The United States is also spearheading a process for WTO reform and is active in ongoing negotiations.
U.S. climate action and efforts to boost resilience in critical supply chains will also generate significant positive spillovers. Our trading partners share our urgency on the important role of supporting emerging climate-critical technologies and diversifying supply chains for green technologies and renewable energy in achieving global climate goals. Importantly, building resilience in supply chains reflects one of the key lessons learned from the COVID crisis, Russia’s energy embargo against Europe, and China’s policies against its neighbors in the Asia-Pacific. We are disappointed that Fund staff do not offer any analysis to back their assertions that U.S. policies will contribute to geoeconomic fragmentation and do not acknowledge the risks of insufficiently diversified clean technology supply chains. The domestic content provisions in the IRA represent a very small part of a much broader package to reach our climate goals and are not mandatory requirements but incentives which will help boost investments in underserved communities. We are also troubled by the lack of even-handedness with regard to the assessment of trade openness in the U.S. Article IV relative to that of other major economies, which, in contrast to the United States, have maintained significant and highly distortionary domestic content requirements for many decades. The Administration has been clear that we do not intend to decouple our economy from key trading partners and that our goal is to promote healthy economic competition. We urge staff to take a close look as to whether its recommendations on trade and fragmentation are applied to other major economies in a similar manner.
Finally, we welcome the coverage of governance and anti-corruption in the U.S. Article IV report and urge other major economies to support inclusion of such coverage in their own surveillance.