Europe will pay the price for Greece
The rest of the EU should take no pleasure in Tsipras’s discomfort
by: Philip Stephens
Europe will pay the price for Greece
IMF Executive Board Concludes Article IV Consultation with United States
Press Release No. 15/322
July 7, 2015
On July 6, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the United States.1
The U.S. economy’s momentum in the first quarter was sapped by unfavorable weather, a sharp contraction in oil sector investment, and the West Coast port strike. But the underpinnings for a continued expansion remain in place. A solid labor market, accommodative financial conditions, and cheaper oil should support a more dynamic path for the remainder of the year. Despite this, the weaker outturn in the first few months of this year will unavoidably pull down 2015 growth, which is now projected at 2.5 percent. Stronger growth over the next few years is expected to return output to potential before it begins steadily declining to 2 percent over the medium term.
Inflation pressures remain muted. In May headline and core personal consumption expenditure (PCE) inflation declined to 0.2 and 1.2 percent year on year, respectively. Long-term unemployment and high levels of part-time work both point to remaining employment slack, and wage indicators on the whole have shown only tepid growth. When combined with the dollar appreciation and cheaper energy costs, inflation is expected to rise slowly staring later in the year, reaching the Federal Reserve’s 2 percent medium-term objective by mid 2017.
An important risk to growth is a further U.S. dollar appreciation. The real appreciation of the currency has been rapid, reflecting cyclical growth divergences, different trajectories for monetary policies among the systemically important economies, and a portfolio shift toward U.S. dollar assets. Lower oil prices and increasing energy independence have contained the U.S. current account deficit, despite the cyclical growth divergence with respect to its main trading partners and the rise in the U.S. dollar. Nevertheless, over the medium term, at current levels of the real exchange rate, the current account deficit is forecast to widen toward 3.5 percent of GDP.
Despite important policy uncertainties, the near term fiscal outlook has improved, and the federal government deficit is likely to move modestly lower in the current fiscal year. Following a temporary improvement, the federal deficit and debt-to-GDP ratios are, however, expected to begin rising again over the medium term as aging-related pressures assert themselves and interest rates normalize. In the near-term, the potential for disruption from either a government shutdown or a stand-off linked to the federal debt ceiling represent important (and avoidable) downside risks to growth and job creation that could move to the forefront, once again, later in 2015.
Much has been done over the past several years to strengthen the U.S. financial system. However, search for yield during the prolonged period of low interest rates, rapid growth in assets in the nonbank sector, and signs of stretched valuations across a range of asset markets point to emerging pockets of vulnerabilities. The more serious risks are likely to be linked to: (1) the migration of intermediation to the nonbanks; (2) the potential for insufficient liquidity in a range of fixed income markets that could lead to abrupt moves in market pricing; and (3) life-insurance companies that have taken on greater market risk. But several factors mitigate these downsides. In particular, the U.S. banking system has strengthened its capital position (Tier 1 capital as a ratio of risk-weighted assets is at about 13 percent) and appears resilient to a range of extreme market and economic shocks. In addition, overall leverage does not appear excessive, household and corporate balance sheets look generally healthy, and credit growth has been modest.
The consultation focused on the prospects for higher policy rates and the outlook for, and policy response to financial stability risks, integrating the findings of the latest IMF Financial Sector Assessment Program for the U.S.
Executive Board Assessment2
Executive Directors agreed with the thrust of the staff appraisal. They noted that the economic recovery continues to be underpinned by strong fundamentals, despite a temporary setback, while risks remain broadly balanced. Directors observed that considerable uncertainties, both domestic and external, weigh on the U.S. economy, with potential repercussions for the global economy and financial markets elsewhere. These include the timing and pace of interest rate increases, prospects for the dollar, and risks of weaker global growth. Directors stressed that managing these challenges, as well as addressing longstanding issues of public finances and structural weaknesses, are important policy priorities in the period ahead.
Directors agreed that decisions on interest rate increases should remain data-dependent, considering a broad range of indicators and carefully weighing the trade-offs involved. Specifically, they saw merit in awaiting clear signs of wage and price inflation, and sufficiently strong economic growth before initiating an interest rate increase. Noting the importance of the entire path of future policy rate changes, including in terms of the implications for outward spillovers and for financial markets, Directors were reassured by the Federal Reserve’s intention to follow a gradual pace of normalization. They welcomed the Federal Reserve’s efforts, and commitment to continue, to communicate its policy intentions clearly and effectively. Directors acknowledged that financial stability risks could arise from a protracted period of low interest rates. In this regard, they underscored the importance of strong regulatory, supervisory, and macroprudential frameworks to mitigate these risks.
Directors commended the authorities for the progress in reinforcing the architecture for financial sector oversight. They concurred with the main findings and recommendations of the Financial Sector Assessment Program assessment. Directors highlighted the need to complete the regulatory reforms under the Dodd-Frank Act and to address emerging pockets of vulnerability in the nonbank financial sector. They encouraged continued efforts to monitor and manage risks in the insurance sector, close data gaps, and improve the effectiveness of the Financial Stability Oversight Council while simplifying the broader institutional structure over time. Directors looked forward to further progress in enhancing cross-border cooperation among national regulators, and the framework for the resolution of cross-jurisdiction financial institutions.
Directors noted that there remain a range of challenges linked to fiscal health, lackluster business investment and productivity growth, and growing inequality. They agreed that reforms to the tax, pension, and health care systems will help create space for supporting near-term growth, including through infrastructure investment. Directors reiterated the need for a credible medium-term fiscal strategy that would anchor ongoing consolidation efforts, underpin debt sustainability, and reduce fiscal uncertainties. They called for renewed efforts to implement structural reforms to boost productivity and labor force participation, tackle poverty, address remaining weaknesses in the housing market, and advance the multilateral trade agenda.
It is expected that the next Article IV consultation with the United States will be held on the standard 12-month cycle.
United States: Selected Economic Indicators 1/
1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
2 At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.
IMF COMMUNICATIONS DEPARTMENT
Contributing Op-Ed Writer
It’s Time for Greece to Leave the Euro
July 8, 2015, 3:40 PM ET
Higher Rates Wouldn’t Tame Bubbles Even if Central Banks Tried, IMF Paper Says
By Pedro Nicolaci da Costa
Economists at the International Monetary Fund have found a new reason for central bank officials to avoid using interest rates to dampen asset bubbles and market risk: it probably wouldn’t work.
That’s the finding of a new working paper that identifies different patterns in lending between banks and nonbanks. The gap means raising borrowing costs to curb market excesses might simply push risks into less regulated financial firms sometimes referred to as the “shadow” banking system.
“The different credit and business cycles magnify the tradeoffs of using interest rates to contain financial stability risks,” write IMF staffers Alexander Herman, Deniz Igan and Juan Solé. “From a policy perspective, our analysis is more supportive of placing greater emphasis on macroprudential measures than on using interest rates to address risks in the financial sector.”
By “macroprudential measures,” they were referring to regulatory and supervisory tools such as credit restrictions on specific industries or limits on loan-to-value ratios.
The research adds to the debate over whether central banks should consider raising interest rates to prick apparent financial asset bubbles while they are forming, to forestall the damage to the financial system that could occur if they burst on their own.
Before the financial crisis, the standard view at many central banks including the Fed was that, because asset bubbles are too hard to spot ahead of time, policy makers shouldn’t raise rates to restrain them. Instead, officials should wait until after they burst, and if necessary cut interest rates to help the economy recover afterward. This was sometimes referred to as “mopping up.”
The heavy toll of the 2008 financial crisis that followed the housing bubble, estimated at several trillion dollars in lost economic output and millions of jobs eliminated, led many policy makers to question that view. The mess was simply too great to mop up.
Many Fed officials now say interest rate increases should only be used as a second line of defense against asset bubbles because they could unnecessarily curtail economic recovery. San Francisco Fed President John Williams has argued against ever using rate increases to lessen financial stability risks, saying the cost would be far too high.
The IMF economists largely agree: “During output downturns, supervisory scrutiny should be intensified to counter the continued accumulation of financial risks.”
Regulators must do this by focusing on long-term risk trends, not simply short-run market fluctuations, the authors say.
“By adopting a short-term view and focusing on recent incremental changes in risk metrics, financial stability practitioners may miss the secular accumulation of key vulnerabilities,” they write. “The unpleasant analogy, here, is the one of the frog in the boiling pot.”
Les doy cordialmente la bienvenida a este Blog informativo con artículos, análisis y comentarios de publicaciones especializadas y especialmente seleccionadas, principalmente sobre temas económicos, financieros y políticos de actualidad, que esperamos y deseamos, sean de su máximo interés, utilidad y conveniencia.
Pensamos que solo comprendiendo cabalmente el presente, es que podemos proyectarnos acertadamente hacia el futuro.
Gonzalo Raffo de Lavalle
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Quien conoce su ignorancia revela la mas profunda sabiduría. Quien ignora su ignorancia vive en la mas profunda ilusión.
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