Abstract
KEY ISSUES Strategy: The 2015 U.S. Article IV consultation centered on the prospects for higher policy rates and the outlook for, and policy response to, financial stability risks, integrating the findings of the Financial Sector Assessment Program (FSAP). Main findings and policy messages: • The underpinnings for continued growth and job creation remain in place despite momentum being sapped in recent months. • The FOMC should remain data dependent, carefully weighing the risk of weakening progress toward full employment and having to return to zero interest rates versus the risk of creating a temporary rise of inflation above the Fed’s medium-term goal and having to subsequently raise policy rates at a faster pace. • The FOMC should defer its first increase in policy rates until there are greater signs of wage or price inflation than are currently evident. Based on staff’s macroeconomic forecast, and barring upside surprises to growth and inflation, this would imply a gradual path of policy rate increases starting in the first half of 2016. • Pockets of financial vulnerabilities are emerging, putting a premium on improving the resilience of the financial system. Regulatory reforms remain incomplete and the structure of oversight has scope to be strengthened along a number of dimensions. • A credible and detailed medium-term consolidation plan is needed to address rising health and social security costs and to improve the tax system. Such a plan would provide near-term fiscal space to finance supply-side measures that support future growth. • A range of policy challenges linked to poverty, productivity, and labor force participation remain largely unaddressed.
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. An upward revision to first quarter GDP. Growth in the first quarter was revised up to -0.2 percent, suggesting that the temporary factors that hampered growth in the winter were a smaller drag than had been previously thought. Staff, however, has maintained its annual growth projection for 2015 at 2.5 percent, with recent data pointing to a modestly slower second quarter than had been assumed in the forecasts underpinning the staff report.
3. A generally upbeat picture from other indicators. Recent data releases have shown real personal consumption expenditures and consumer sentiment rebounded in May, personal income growth remains solid, manufacturing surveys are improving, and housing data shows a mild but steady recovery. Inflation continues to be subdued (core PCE inflation was 1.2 percent in May). Nonfarm payrolls in June added 223 thousand jobs—close to Consensus expectations—with the unemployment rate falling to 5.3 percent, mainly reflecting a decline in the participation rate. Average hourly earnings slowed to 2.0 percent year-over-year in June—0.3 percentage points below Consensus expectations—from 2.3 percent in May.
4. The Supreme Court ruled on the Affordable Care Act. In a 6–3 decision, the U.S. Supreme Court upheld a key provision of the Affordable Care Act. The Court ruled that health insurance subsidies should continue to be available for those states that have not set up their own health insurance exchanges and are, instead, using the federal exchange.
5. Trade Promotion Authority was approved by Congress and signed by President Obama. The Congress approved Trade Promotion Authority on June 24, allowing for an up-or-down vote (so-called “fast track”) on future trade deals. In addition, Trade Adjustment Assistance was signed into law, renewing funding for assistance and job training to workers displaced by the forces of globalization. This legislation opens the way for a congressional vote on the Trans-Pacific Partnership, potentially as early as this Fall.
6. The Export-Import Bank’s authority to extend new loans, guarantees or credit insurance expired on June 30. The bank will, however, continue to operate and manage transactions related to its existing portfolio.
7. Puerto Rico’s fiscal crisis. The fiscal situation in Puerto Rico continues to deteriorate, raising concerns that the commonwealth may be unable to service its $72 billion in public debt. On July 1 the Puerto Rico Electricity Power Authority reached an agreement with its creditors that allowed it to meet a debt service payment that was due that day and extended until September 15 a forbearance agreement between the utility and its creditors. The bondholders and the utility continue to work on a long-term plan to put the finances of the company on a sustainable footing. Puerto Rico’s Governor Padilla announced on June 30 that the commonwealth’s debts are “not payable” and has established a working group to analyze, by August 30, the options for a “complete restructuring and development plan” for Puerto Rico.
8. The impact on the U.S. of recent events in Greece has, so far, been modest. Following the Greek government’s call for a referendum, U.S. equity markets fell by around 2 percent, the 10-year U.S. Treasury rate fell by 10 basis points, and the U.S. dollar strengthened around 1 percent versus the Euro.