U.S. Department of the Treasury

It is a pleasure to be back at the CFA’s Fixed Income Management conference.  The last time I spoke at a CFA conference, my remarks were from the viewpoint of a portfolio manager and market participant.  Since then, I have returned to the U.S. Treasury Department to focus on the international economic and financial policy priorities facing the United States.  Having started my career at Treasury, I feel fortunate to have had the opportunity to come back to public service with the perspective of eight years of experience in the private sector.  In my remarks today, I would like to give you some insight on the Treasury Department’s work in the area of international economic and financial policy and its connection to broader U.S. goals in the world.

Let me start by putting the international work of Treasury in context.  Treasury’s International Affairs group has the lead within the U.S. government on the agenda for strengthening the global economy and promoting global financial stability, which advance U.S. interests at home and abroad.  International Affairs is one of three main policy offices at Treasury.  We are joined by Domestic Finance—which focuses on federal debt finance, financial institutions, regulation, and capital markets—and Terrorism and Financial Intelligence—which develops and implements strategies to combat terrorist financing domestically and internationally, advance the national anti-money laundering strategy, and fight financial crimes.  Of course there is considerable overlap among these three policy areas, and we work closely together on issues such as financial market monitoring, regulatory reform, and sanctions policy.

There are numerous reasons why the Treasury invests the time and attention that we do in International Affairs.

• First, the health of the U.S. economy is integrally linked to that of the global economy.  The strength of our key trading partners affects demand for U.S. exports of goods and services, which last year amounted to $2.3 trillion, or 14 percent of U.S. GDP, and supported 11.7 million American jobs.

• Second, financial developments abroad can have significant impacts here at home, not only on asset markets but also on the real economy.  Working together with foreign governments on issues of mutual interest and putting in place an architecture to prevent disorderly disruptions—and contain their consequences when they occur—are thus important to preserving a stable environment for economic growth and job creation. 

• Third, we have a shared interest in cultivating a global economy that provides opportunities for those around the world to create jobs, raise incomes, reduce poverty, improve health, and generally achieve a better life.  In the long run, strong, stable, and sustainable economic growth is the lynchpin to achieving the full range of social, development, and humanitarian goals that we value as citizens of the world and leaders of the world’s largest economy.

• Finally, economic growth and stability are often linked closely to political stability, particularly in regions of the world confronting the forces of extremism and violence.  Achieving political and security goals therefore typically includes a vital economic dimension.

Carrying out Treasury’s international mission requires close coordination with officials from other agencies in the U.S. government, including the White House, the National Security Council, the State Department, the Commerce Department, and the U.S. Trade Representative (USTR).  It also requires extensive engagement with finance ministry and central bank counterparts from other governments both bilaterally—in dialogues such as the U.S.-China Strategic and Economic Dialogue—and in multilateral forums—such as the G-7 and G-20, as well as the boards of the international financial institutions, including the International Monetary Fund, the World Bank, and the regional development banks.

International economic and financial diplomacy is called “diplomacy” for a reason.  Our foreign counterparts each have their own priorities and ideas on how to best support their economies and address the challenges confronting the world economy.  Our job at Treasury is not only to analyze problems and identify our desired solutions, but also to formulate and execute the plans for engaging other key players in the global system to gain the necessary support for turning those proposals into action.

With that context in mind, let me now describe three areas of the Treasury’s work that are particularly relevant to the present moment.  First, I will provide an assessment of the current state of the global economy and the policy responses we think are appropriate to bolstering global prospects in the near term.  Second, I will discuss some of the actions that we have taken or are advocating to strengthen the international financial system to support economic growth and financial stability over a longer time horizon.  Finally, consistent with our role in monitoring and responding to unexpected events or potential shocks that could negatively impact the global economy or other issues of importance to the United States abroad, I will discuss our recent engagement in Ukraine and Greece, as well as recent global market volatility. 

Secretary Lew and those of us on the international team at Treasury recently returned from the IMF/World Bank Annual Meetings in Lima, Peru—during which senior economic officials gathered to discuss the state of the global economy, take stock of various ongoing initiatives in areas ranging from financial regulation to climate finance, and identify potential risks to the global outlook.  Immediately prior to the Annual Meetings, the IMF marked down its forecast for 2015 global growth by 0.2 percentage points to 3.1 percent, the lowest level since the global financial crisis.  Against this backdrop, the discussions in Lima centered on the fact that global economic growth remains modest and too weak to generate the kind of job and income growth the world needs.  

The positive news is that prospects for advanced economies as a whole continue to be supported by economic performance in the United States.  Favorable underlying fundamentals suggest that U.S. economic growth will continue apace during the latter part of 2015 and through the end of 2016.  Consumer confidence in the United States is near an eight-year high, and improvements in labor market conditions continue to boost incomes.  Household balance sheets have strengthened, reflecting growth in home and equity prices as well as considerable progress in deleveraging.  Fiscal policy is no longer a drag on economic activity, and inflation is low and stable.  A consensus of private forecasters is projecting GDP growth of roughly 2½ percent on average through the end of 2016.  

Economic activity in the euro area has also improved overall.  For 2015, euro area real GDP growth is projected to increase to around 1.5 percent from 0.9 percent in 2014.  A challenge in Europe is that growth within the euro area remains uneven, with strong growth projected in Spain, modest growth in Germany and weak growth in France and Italy.  In addition, headline inflation is close to zero, core inflation remains well below the European Central Bank (ECB) target, and unemployment remains high at 11 percent.

On the negative side, weakness in emerging markets is a key reason for the global slowdown.  As a group, emerging economies are growing considerably more slowly than they did before the global financial crisis, with growth this year expected to decelerate for the fifth straight year.  The decline in growth primarily reflects weaker prospects for some large emerging market economies and commodity-exporting countries against the backdrop of lower commodity prices.  In particular, slowing growth in China is contributing to weakness elsewhere, with the third-quarter GDP data indicating year-over-year growth below 7 percent led by weak investment growth, which has fallen to its lowest level in 15 years.  In addition, a few advanced economies are faltering; for example, Japan and Canada have experienced two consecutive quarters of negative growth. 

Amid these indications of disappointing growth prospects across many countries—alongside inflation that in many cases remains well below the targets of central banks, particularly in advanced countries—we have encouraged global policymakers to redouble efforts to energize global demand.  As Secretary Lew puts it, it is essential that economic leaders more effectively deploy all policy levers—fiscal, monetary, and structural—to boost their economies.  Deploying available fiscal resources where available supports domestic demand while complementing structural reforms to boost growth down the road.  

While the European Central Bank has implemented measures to support growth and combat downward price pressures, monetary policy action alone will not suffice to generate a sustainable increase in euro area domestic demand, which has yet to return to the 2007 level.  Several countries have additional space for fiscal policy to more forcefully boost domestic demand in ways that, when considered in a euro area wide context, support the implementation of important structural reforms.

Negative second quarter growth and soft incoming data for the third quarter in Japan further highlight the need for a vigorous application of all arrows of Prime Minister Abe’s economic program—including fiscal policy.  In addition, structural reforms to boost labor supply are urgently needed in Japan, and should include policies to reduce the gender gap in labor force participation and retain older workers.  

The moderation in growth in China is not unexpected as that country continues the necessary transition from an export- and investment-led growth model to a more consumption-oriented economy.  The question is whether this shift can be managed in a smooth and orderly fashion against the backdrop of increases in debt, overbuilding in the property sector, and excess industrial capacity that developed in the past few years.  Continued implementation of reforms articulated in the Third Plenum remains critical to a successful transition.  China retains a broad array of tools that can be deployed to support this transition in the current environment.  For example, fiscal policy can assist in the economy’s rebalancing by strengthening the social safety net and alleviating the tax burden on workers and households, which in turn supports private consumption.  

One reason that bilateral and multilateral meetings such as those we recently attended in Lima are so valuable is that they provide an opportunity to hear first-hand how our counterparts frame the challenges facing their economies, while also providing an opportunity for us to share U.S. experiences that are relevant to the same challenges.  For example, it is one thing to talk about fiscal expansion in the abstract as a way of supporting the economy; it is another to speak in concrete terms about the role that the payroll tax holiday in the United States for 2011 and 2012 directly increased take-home pay for workers in a way that encouraged employment and supported domestic demand during a critical period in the recovery.

As you may know, another feature of these large international meetings is a communique, which is painstakingly negotiated to reflect a unanimous consensus among the participants.  Some parts of those communiques endorse specific policies or reforms, for example in areas like financial regulation or international tax rules.  Other parts are statements of shared commitments.  This is very important in areas where the absence of agreed rules of the road could lead to economic conflict.  Significant in this regard were the declarations in early September by the ministers at the G-20 meeting held in Turkey and the Asia-Pacific Economic Cooperation (APEC) meeting held in the Philippines for countries to “refrain from competitive devaluations, and resist all forms of protectionism.”  It is also important in areas where a common diagnosis of shared problems and the appropriate responses are still being developed and debated.  So when the G-20 ministers agreed that “monetary policy alone cannot lead to balanced growth,” it reflected the socialization of the idea that more needs to be done to achieve our growth objectives, putting squarely onto the agenda for future discussions the particular policies to reach these goals and a platform for monitoring progress.  

Our objective is not only to bolster growth for the near-term, but also to lay a foundation for more robust and stable long-term economic performance.  Laying such a foundation often involves creating, improving, or strengthening the rules and institutions that undergird the framework for global economic and financial activity.  Let me give three specific areas reflecting the Administration’s priorities in the global economy.

The first area is the Trans-Pacific Partnership (TPP), a trade agreement between the United States and eleven other countries bordering the Pacific Rim, representing nearly 40 percent of global GDP.  Negotiators finalized an agreement on TPP on October 5 after over five years of talks.  USTR led the Administration’s efforts on TPP.  Treasury was responsible for the negotiations on banking and other non-insurance financial services, as well as supporting a range of other parts of the negotiations.  In addition, Treasury has been working with its counterparts in other TPP countries to strengthen cooperation on macroeconomic and exchange rate issues, and to promote our shared interest in preventing unfair currency practices.  Once fully implemented, we expect TPP to reduce trade barriers across a large portion of the Pacific region, raising growth prospects for the United States and our trading partners.

The second area is the global financial regulatory reform agenda.  Working with finance ministers, central bankers, and regulators in the G-20 and the Financial Stability Board, Treasury has pushed for more robust financial standards and supervisory cooperation to address issues highlighted by the global financial crisis.  Some of our key financial reform priorities include: strengthening capital and liquidity requirements for banks; developing resolution regimes and addressing too-big-to-fail financial institutions; bringing transparency to over-the-counter derivative markets; and identifying regulatory gaps to more comprehensively address systemic risks within financial products, markets, and institutions.  We have made progress on many of these priorities, particularly on bank capital and liquidity and on resolution regimes, but we have more work to do.  By the upcoming G-20 Leaders’ Summit in Turkey, we anticipate reaching a milestone related to the finalization of a common international standard on total loss absorbing capacity (TLAC) for global systemically important banks designed to support orderly resolution of cross-border banks without resorting to taxpayer bailouts.

The third area is reform of the IMF.  The IMF has been the central safeguard to the international monetary system since its establishment in 1944 at the Bretton Woods Conference.  The IMF remains the preeminent global institution for building cooperation and responding to crises that impact the international monetary and financial system, and encouraging sound economic and financial policies that boost global growth and welfare.

The IMF’s role in recent years underscores how vital it remains to our nation’s economic and national security interests.  The IMF’s technical and financial support for Europe during the euro area crisis helped stave off a serious threat to our economy and American workers.  The IMF’s ongoing support for Ukraine’s economy has helped us meet our commitment to the Ukrainian people and support their right to choose their own destiny.  IMF financial assistance and policy advice have also played key roles in countries like Tunisia and Jordan, as they consolidate economic reforms amid a challenging regional situation.  In addition, the IMF’s financial and technical assistance to low-income countries in Africa, Asia, and Latin America helps put them on a stronger economic footing as they seek to put in place frameworks to promote growth and reduce poverty.  

It is vital that the United States maintain its leadership role within the IMF, but that role is at risk.  In 2010, G-20 Leaders and the IMF membership decided on a set of quota and governance reforms aimed at further cementing the IMF’s critical role within the international monetary system.  The 2010 reforms are an important step in modernizing IMF governance to better reflect countries’ economic weights in the global economy.  Implementation of these reforms has been held up by the failure of the United States to pass legislation approving them.  Secretary Lew has emphasized on numerous occasions that it is urgent that Congress act in the coming weeks to get this done.  Congressional approval of IMF reforms will send a clear message that America is determined to maintain our commitment to and leadership at the IMF and within the international financial system.  If the United States does not continue to play its part, others will step forward to do so.

Whether caused by a geopolitical conflict or sudden financial shock, there are inevitably times where new issues appear or become elevated on the day-to-day agenda of Treasury’s work.  Our objective of course is to be proactive in identifying sources of risk, so that they can be managed and mitigated ahead of time to the greatest extent possible.  I would like to conclude by discussing some of the risk monitoring and crisis management work that has been relevant recently.  

The first example is that of Ukraine.  In the wake of the Maidan protests of late 2013, Russia’s seizure of Crimea, and separatist insurgency in eastern Ukraine, the United States has pursued a two-pronged strategy:  first, to raise the costs to Russia of continued aggression against Ukraine; and second, to support the political and economic reforms of the new Ukrainian government.  Treasury has played a central role in both elements of this strategy.  On the one hand, we have worked with our European allies to implement a carefully targeted sanctions regime designed to impose an economic cost on Russia for its actions in Ukraine while minimizing the collateral impact on the United States and our European partners.  The decline in oil prices coupled with these sanctions has had a significant impact on Russian economic performance, with the economy projected to contract 3-4 percent this year after growing just 0.6 percent in 2014.

At the same time, Treasury has worked closely with the White House and State Department, the U.S. Congress, the IMF and World Bank, and our European partners to mobilize an extraordinary financial support package for Ukraine, conditioned on sustained implementation of reforms to stabilize, revitalize, and restructure Ukraine’s economy.  The IMF’s $17.5 billion program has been complemented by two $1 billion U.S. loan guarantees that have helped to support key IMF-backed reforms to improve the business climate, tackle corruption, reform the energy sector, and mitigate the impact of economic adjustments on Ukraine’s most vulnerable households.  Thanks to this partnership between international donors and a Ukrainian government that has followed through on its reform commitments—despite extraordinary political and security pressures—the financial situation in Ukraine has stabilized following the precipitous plunge of the currency in early 2015.  The situation remains extremely difficult and enormous work lies ahead, but it was evident when I visited Kyiv in September that a broad swath of Ukrainians from government officials to leaders of the political parties to civil society is determined to use this opportunity to address long-standing and deep-seated problems in the political and economic system.

The second example is Greece, which captured extensive media attention this summer.  We are all familiar with the history of the crisis in Greece and the first program by the so-called “troika” of the IMF, ECB, and European Commission in 2010, as well as the intense period of crisis in 2012.  Fortunately, the U.S. economy and the global financial system are much stronger today than during those previous periods of crisis.  At the same time, at a moment when global economic performance remains tepid amid concerns about China and the emerging markets, the last thing that the global economy needs is another headwind from a crisis in Europe or questions about the viability of the euro area.

For this reason, throughout this year, U.S. Treasury officials have been in close contact with all participants in the Greek discussions—the Greek authorities, key European member states, the ECB, the European Commission, and the IMF—to urge all sides to work together to find a constructive path forward.  We are in a position to approach these discussions from the perspective of a trusted partner to the various key players, capable of offering advice and perspective from outside the direct negotiations.  Our view has consistently been that Greece needs to implement critical reforms to establish a foundation for a durable economic recovery, and that as Greece delivers on its reform commitments, it merits financial assistance and debt relief necessary to support a return to growth.  With the agreement between Greece and its European partners launching a new financial assistance program in August 2015, the framework for this is now in place, with the focus now shifting to implementation by all sides—a process with which the United States continues to be engaged.

Finally, let me say a few words about the financial market volatility of the late summer and the outlook for emerging markets.  Assessing the risks associated with such market moves often entails two basic questions.  First, what, if any, information about underlying fundamentals of concern to a policymaker is being revealed by market movements?  Second, do the moves in and of themselves generate sources of risk that should be of concern (e.g., self-fulfilling dynamics, risks of institutional failure)?  It was evident that there were a number of factors underlying the spike in both actual and implied volatility across markets starting in August, ranging from concerns about China to speculation about the timing of monetary policy moves.  Emerging market assets exhibited particular volatility.

The fundamentals related to China and emerging markets had been receiving a great deal of attention in our work for months preceding the market volatility.  I have already discussed China, so let me say a few words about emerging markets, where there is good news and bad news.  The good news is that most emerging market economies continue to have financial buffers that are considerably larger than they were in the 1990s and early 2000s when they were buffeted by a succession of financial crises.  So while some emerging markets face notable vulnerabilities, including high levels of corporate leverage amid declining commodity prices, we have not seen in this recent episode (or amid the sizable currency depreciations since 2013) the kind of devaluation-default feedback dynamics that paralyzed many countries during that earlier period.  The bad news is that those financial buffers are considerably smaller for a number of emerging markets than they were entering the 2008-9 global financial crisis, when many deployed aggressive counter-cyclical policies to respond to the global contractionary forces.  At present, some countries find themselves compelled to adopt more conservative policy stances out of concern for financial stability, which means a more negative outlook for growth and greater threats of financial disruptions.  Those ongoing risks remain a key focus of our work.

Thank you once again for the opportunity to speak before you today.  I look forward to taking your questions in the time we have remaining.   

###