Abstract
Focus. The 2014 Article IV Consultation focused on five broad themes to strengthen therecovery and improve the long-term outlook: raising productivity growth and labor force participation, confronting poverty, keeping public debt on a sustained downward path, smoothly managing the exit from zero policy rates, and securing a safer financial system.Main policy issues.• Policies are needed to boost longer-term potential output through investments in infrastructure, raising educational outcomes, improving the tax structure, and developing and expanding a skilled labor force (including through immigration reform, job training, and providing childcare assistance for working families).• Forging agreement on a credible, medium-term consolidation plan should be a high priority and include steps to lower the growth of health care costs, reform social security, and increase revenues. In the absence of such a comprehensive agreement, efforts should still focus on identifying more modest opportunities to relax the near- term budget envelope, paid for with future fiscal savings.• An enduring consequence of the past recession has been a jump in the number of families living in poverty. Improved employment prospects and economic growth will be essential to reverse this upward movement. An expansion of the Earned Income Tax Credit and an increase in the minimum wage should also be part of the solution.• The goal for monetary policy is to manage the exit from zero interest rates in a manner that allows the economy to converge to full employment with stable prices while avoiding financial instability and negative spillovers to the global economy. This is a complex undertaking. To facilitate it, steps could be taken to expand the Fed’s communications toolkit so as to provide greater clarity on how the Federal Open Market Committee assesses progress toward its longer-run goals.• Continued regulatory oversight is needed to counter the emergence of financial imbalances, particularly those that may be growing outside of the banking system. Policies should also be deployed to keep mortgage credit accessible and attract more private capital into housing finance while minimizing risks to taxpayers.• The U.S. external position is assessed to be broadly consistent with medium-termfundamentals and desirable policies.
1. This statement reports on information that has become available since the staff report was issued. It does not alter the thrust of the staff appraisal.
2. Recent indicators. Labor market conditions continued to improve. Jobless claims fell in the first week of July and are on a downward path from earlier in the year. The number of job openings rose in May to their highest levels since August 2007. Retail sales growth in June was solid and there were upward revisions to the data for April and May. An increase in the July homebuilder’s index suggests improving confidence in the housing recovery. The Fed’s Empire manufacturing index for July was at its highest level since May 2010 and industrial production grew at (an annualized) 5.5 percent in the second quarter of the year.
3. Fed outlook. In testimony to the Congress on July 15 and 16, Chair Yellen noted that the still-elevated unemployment rate, depressed participation rates, and slow pace of wage growth suggest that the level of slack in the labor market remains considerable, despite recent improvements in labor market indicators. Chair Yellen noted that “almost all” FOMC participants expected the first rate hike at some time in 2015 and that asset purchases would likely conclude after the October FOMC meeting. The Fed Chair assessed that the threats to financial stability at this stage appeared moderate.
4. Regulatory cooperation. On July 8, the US Treasury and the European Commission reiterated their commitment to cooperate on financial market regulation, in particular on OTC derivatives regulation and cross-border resolution.
5. The Mid-Session Budget Review. The growth projection for 2014 was revised down from 3.1 percent in the March Budget to 2.4 percent (although the estimate does not incorporate the latest GDP estimate for Q1). Average growth in 2015–19 is also projected to be slightly lower than in the Budget. These revisions imply there will be modestly larger fiscal deficits and a higher debt-to-GDP ratio over the medium term. Nevertheless, the federal deficit for FY2014 and 2015 has been revised down by around ¼ percent of GDP in each year (to 3.4 and 2.9 percent of GDP respectively) due to slower-than-expected spending in a range of programs (including the use of Hurricane Sandy recovery funds, defense spending, and healthcare).
6. Legislative action. On July 9, Congress passed the “Workforce Innovation and Opportunity Act”, a compromise between the Senate and House versions of a bill that reauthorizes and streamlines the existing job training programs and gives states more flexibility in using federal funds. Committees in the House and Senate have both approved measures to temporarily address the funding of the Highway Trust Fund; work will now aim to reconcile the differences between the two proposals.