On June 29, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the United States. [1]

The near-term outlook for the U.S. economy is one of strong growth and job creation. Unemployment is near levels not seen in 50 years, and growth is set to accelerate, aided by a fiscal stimulus, a recovery of private investment, and supportive financial conditions. These positive outturns have supported, and been reinforced by, a favorable external environment. The balance of evidence suggests that the U.S. economy is beyond full employment.

A slow but steady rise in wage and price inflation is expected as labor and product markets tighten. Core PCE inflation is expected to rise modestly above 2 percent by mid-year. Wages have been growing broadly in line with (relatively weak) labor productivity growth, leaving unit labor costs virtually unchanged over the past 2 years. In the next several months, wages and unit labor costs are anticipated to increase at a modest pace.

Despite good near-term prospects, a number of vulnerabilities are being built-up. The planned expansion in the federal deficit at this stage of the cycle could trigger a faster-than-expected rise in inflation. That would be accompanied by a more rapid rise in interest rates that could increase market volatility both in the U.S. and abroad. There is a risk of a marked reversal of capital flows, particularly from emerging markets with weaker macroeconomic fundamentals. The net effect of U.S. budget and tax policy choices will exacerbate an already unsustainable upward dynamic in the public debt and leave few budget resources available to invest in a range of urgently needed supply-side reforms, including infrastructure spending. It will also contribute to a rise in global imbalances. These risks are added to by recent actions by the U.S. to impose tariffs on imports.

The consultation focused on the policies needed to address these risks, rebuild fiscal space, preserve financial stability, support low- and middle-income households, incentivize work, and raise medium-term living standards.

Executive Board Assessment [2]

Directors welcomed the strong performance of the U.S. economy, with accelerating growth, low unemployment, and muted inflation. They also welcomed the favorable near‑term outlook and the prospect of marking the longest economic expansion in its recorded history. At the same time, Directors observed heightened policy uncertainty and medium‑term vulnerabilities, including rising public debt, trade tensions, and income inequality. They stressed that developments and policy actions in the United States have significant implications for the rest of the world, and encouraged the authorities to take that consideration into account in their policy decisions.

Directors recognized the objectives of the fiscal strategy and tax reform, with its many positive features, in supporting growth and promoting structural changes to unleash the economic potential. They observed that, at the current stage of the business cycle, the expansionary fiscal policy stance, while boosting U.S. and global output in the near term, could increase risks and uncertainties in the medium term. Specifically, Directors cautioned that the procyclicality of the budget and tax policy plans would adversely affect the fiscal deficit, debt sustainability, and global imbalances. They encouraged the authorities to rebalance fiscal policy, increase the revenue‑to‑GDP ratio through a greater reliance on indirect taxes, and prioritize infrastructure spending. Directors also saw scope for targeting personal income tax relief at lower‑income households, and improving the compliance of tax provisions with the international obligations.

Directors commended the Federal Reserve for pursuing monetary policy normalization in a gradual, data‑dependent, and well‑communicated manner. They stressed the importance of continued adherence to these principles, while being mindful of potential global spillovers as monetary policy tightens. Directors concurred that, given the sizable fiscal stimulus, achieving the dual mandate of maximum employment and price stability would likely require a faster pace of policy rate increases. They pointed to an inflation surprise as an important risk that, if realized, could create volatility in financial markets, with negative global consequences.

Directors raised significant concerns over recent trade policy proposals that could have damaging effects beyond the U.S. economy, trigger retaliatory responses, and undermine the open, fair, rules‑based multilateral trading system. Directors urged the authorities to work constructively together with their trading partners to reduce trade barriers and resolve trade and investment disagreements without resorting to harmful unilateral actions.

Directors noted medium‑term risks to financial stability, including those related to high equity market valuations, rising leverage, weakened underwriting standards, and cyber risks. Managing these risks would require high‑quality and independent supervision. Directors stressed the need to preserve the current risk‑based approach to regulation, supervision, and resolution; strengthen the oversight of nonbank financial institutions; and remain committed to agreed international standards. They looked forward to further progress in implementing the remaining recommendations of the 2015 FSAP.