WASHINGTON - We thank the U.S. mission team, led by Nigel Chalk and Mai Chi Dao, for their policy advice and robust analysis. We broadly concur with staff’s assessment of the U.S. economy, which has proven resilient and continues to see strong growth. We have seen a historic and equitable economic recovery since the start of the Biden Administration, with an expanding labor force and low unemployment, rising business investment, and a significant decline in inflation. The Federal Reserve is adroitly managing the disinflation process. Moreover, the Administration has supported the recovery by taking steps to safeguard financial stability and expand the economy’s productive capacity in a manner that is inclusive and environmentally sound. We believe that maintaining prudent, forward-looking policies is the most effective way of supporting medium-to-long-term growth.
As staff note, the U.S. economy has turned in a remarkable performance over the past few years, and the United States is the only G20 economy that is now operating above the levels of output and employment that were forecasted prior to the pandemic. The labor market remains healthy and is gradually easing toward stable and sustainable growth as labor supply and demand realign. Carefully calibrated Federal Reserve monetary policy has seen inflation ease significantly since mid-2022, even with persistent economic growth and healthy labor markets. Business investment has grown rapidly, and we have had three record years of new business applications. We share staff’s concerns about poverty and inequality but stress that we are witnessing one of the most equitable economic recoveries in U.S. history, with large increases in Black and Hispanic household wealth and disproportionate wage increases for low-income workers. Although inflation remains higher than we would like, we expect rents and core services inflation to further moderate over time, and we believe there is a path for further disinflation while maintaining a healthy labor market. The U.S. banking sector remains sound and resilient, and banks have substantial capital to absorb losses and high levels of liquidity to meet deposit outflows.
Looking to the future, the Biden Administration is prioritizing historic investments aimed at boosting long-term productivity and addressing inequality. We are starting to reap the benefits of the Inflation Reduction Act (IRA), Bipartisan Infrastructure Law, and CHIPS Act through increased investment in clean energy production, infrastructure, and manufacturing construction. Together, these key pieces of government legislation will increase competitiveness, transform U.S. efforts to tackle climate change, and help to underpin long-term growth. For instance, the Bipartisan Infrastructure Law invests over $800 million in workforce development, the CHIPS Act invests over $11 billion in Research and Development, and several of the IRA provisions include bonus incentives for meeting prevailing wage and apprenticeship criteria. At the same time, the Administration also remains committed to lowering costs for working families and is working to bring down prescription drug costs, health insurance premiums, utility bills, and costs for everyday goods and services.
Monetary Policy
The Federal Reserve remains squarely focused on its dual mandate to promote maximum employment and stable prices for the American people. Over the past two years, the Federal Open Market Committee (FOMC) has significantly tightened the stance of monetary policy to address high inflation. At the FOMC’s most recent meeting in June, the Committee voted to continue to hold the federal funds rate target range at 5.25–5.5 percent and to continue to reduce the Federal Reserve’s securities holdings. The restrictive stance of monetary policy has been clearly communicated and is putting downward pressure on economic activity and inflation. High savings by households and corporates may have mitigated some of the effects of high interest rates, helping sustain strong levels of consumption and investment, as suggested by the staff assessment. While inflation remains above the 2 percent target, it has eased substantially and, notably, without a significant increase in unemployment. The Federal Reserve also has continued to shrink its balance sheet at a brisk pace and in a predictable manner.
The outlook is still uncertain, and the U.S. economy faces both upside and downside risks to the growth outlook. Reducing rates too soon or by too much could result in a reversal of the progress we have seen on inflation and ultimately require even tighter policy to get inflation back to 2 percent. Similarly, easing policy too late or too little could unduly weaken economic activity and employment. As progress on inflation continues and labor market tightness eases, these risks continue to move into better balance. The Federal Reserve remains strongly committed to returning inflation to its 2 percent objective and will remain vigilant to the risks of both higher inflation and weaker employment. In considering any adjustments to the target range for the federal funds rate, the FOMC will make decisions meeting by meeting, continuing to carefully assess the totality of the data, its implications for the outlook, and the balance of risks.
Fiscal Policy
We believe that the current fiscal stance is appropriate and will yield a stronger, more sustainable growth path over the medium term. The Administration is rebuilding the U.S. economy from the middle out and the bottom up by making smart investments in America, educating and empowering workers, and promoting competition to lower costs and help small businesses to support strong, stable, and sustainable economic growth. President Biden’s Investing in America agenda is mobilizing historic levels of private sector investments in the United States, bringing manufacturing back to America after decades of offshoring, and creating new, well-paying jobs, including union jobs and jobs that do not require a college degree. This agenda is transforming our country for the better – reaching communities in every corner of the United States, including those that have too often been left behind.
We concur with staff’s finding that the United States is “at low overall risk of sovereign stress and debt is sustainable" and underscore that the Administration is committed to pursuing a fiscally responsible and sustainable path. The President signed bipartisan legislation that will reduce the deficit by more than $1 trillion, and he has proposed a budget that would yield $3 trillion in savings over the next ten years. The President’s budget keeps real net interest—the cost of servicing our debt after inflation—as a share of the economy close to the average for the last several decades and well below the 2 percent level of the 1990s. We share staff concerns about the potential negative effects on investor and consumer confidence of repeated standoffs over the debt limit and possible government shutdowns, and we are advocating for legislative solutions.
We echo staff’s concerns about the rise in poverty in 2022 following the expiration of critical pandemic era policies and underscore that addressing this is a key policy priority for the Administration. The President’s Budget includes measures, including the enhanced Child Tax Credit, which could lead to a rapid reduction in poverty like the one witnessed between 2019 and 2021. Furthermore, the President’s enacted legislation, including the Bipartisan Infrastructure Law and IRA, are designed to reach the people and places left behind and could serve to reduce poverty in the long run. We believe that the United States needs a balanced approach to fiscal policy that asks the wealthy to pay their fair share while continuing to make investments that support the middle class and grow our economy.
Financial Stability
Amid easing financial conditions globally, the U.S. financial system has remained stable, and the banking sector is sound and resilient. Banks continue to report capital and liquidity ratios above minimum regulatory levels. Overall asset quality remains generally sound. Lending continues to grow but has slowed from the rapid pace of 2022, reflecting decreased demand and tighter lending standards. Liquidity conditions overall are stable. Notably, liquid assets on bank balance sheets remained above their 10-year average throughout 2023, largely the result of a significant buildup in cash positions. Aggregate deposits were generally stable in the second half of 2023 and steadily increased in the first quarter of 2024, reaching a level not seen since before the stress of March of last year. There also has been a decrease in the share of uninsured deposits in the system. Furthermore, our assessments continue to indicate that most banks appear well-positioned to absorb commercial real estate (CRE) credit losses under the most likely scenario of realized losses and gradual recovery over several years.
However, both supervisors and banks must remain vigilant and continue to monitor risks. It has been a little over a year since the sudden failure of Silicon Valley Bank (SVB) and ensuing stress in the banking system—events which prompted questions about how banks manage risks and how the Federal Reserve and other agencies supervise that risk- taking. These events highlighted the need to improve the speed, force, and agility of supervision to align better with the risks, size, and complexity of supervised banks, as appropriate. The banking agencies are working to ensure that supervision intensifies at the right pace as a bank grows in size and complexity, and they are modifying supervisory processes so that issues, once identified, are addressed more quickly by both banks and supervisors. The Administration supports the banking agencies’ independent work to implement the Basel III standards. We believe that a well-capitalized banking sector supports financial stability and economic growth, and robust international standards are important tools to achieve those goals. This includes support for the work of the regulators to revise their liquidity regulations and supervisory processes. We stress that many of these changes to supervision and regulation take time to implement.
The Treasury market is the deepest and most liquid market in the world, with about $800 billion in average daily trading volume and a broad and diverse investor base. Despite the significant yield moves over the last year or two, Treasury market liquidity has been robust and trading conditions orderly. The Treasury Department and its inter-agency partners are working on a range of policy initiatives to make sure the Treasury market remains liquid and resilient for the foreseeable future. The working group’s key areas of focus have been data and transparency, central clearing, and dealer registration. Specifically, in March the Financial Industry Regulatory Authority (FINRA) started dissemination for on- the-run transactions at the end of day and with size caps, and the Office of Financial Research (OFR) finalized a rule to collect data on non-centrally cleared bilateral repo. The Securities & Exchange Commission (SEC) finalized a rule to expand central clearing, especially for Treasury securities transactions on major trading platforms and almost all Treasury repos. The SEC also finalized a rule to require firms engaging in market-making activities to register as dealers. In addition, Treasury has launched a regular buyback program to support market liquidity.
Climate Change
The Inflation Reduction Act (IRA) is helping to accelerate the United States’ deployment and production of clean and affordable electricity. The Department of Energy (DOE) recently released an updated study affirming the transformative climate progress driven by the Inflation Reduction Act and the Bipartisan Infrastructure Law. DOE estimates that the two laws will cut U.S. greenhouse gas emissions by up to 41 percent below 2005 levels by 2030. We are committed to engaging and coordinating with our allies and partners as we work to achieve our climate and energy security goals and are pursuing a shared approach to making the needed investments, for example to developing a robust clean energy supply chain that provides reliable, affordable clean energy. We believe that it is more sustainable to have a diversity of suppliers for critical energy inputs, and we are engaging with partners to build resilient supply chains in key sectors like critical minerals.
Trade and International Context
We find staff’s assessment overly critical of U.S. trade policy with no acknowledgement of the context in which we took these actions. In particular, we disagree with the characterization of tariffs and domestic content provisions as harmful to U.S. growth and labor markets, as well as to the global economy. The United States does not deploy broad- based industrial policies across the entire economy. Instead, U.S. policies are tailored to clear and narrowly scoped objectives with positive externalities, such as addressing climate change. Furthermore, the United States did not take these trade actions in a vacuum—but rather took them to respond to long-standing concerns we and other countries have about China’s unfair economic and trade practices. The United States is promoting supply chain diversification, seeking not to reduce trade but to increase it with a variety of partners. Our view is that more diversified, resilient trade will be beneficial to long-term U.S. and global growth.
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.
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