Despite significant tightening of fiscal and monetary policy in 2022, the U.S. economy has demonstrated remarkable resilience. However, the International Monetary Fund (IMF) anticipates a slowdown in the U.S. economy in the coming years. Specifically, it projects a growth rate of just 1% for the U.S. economy in 2024.
In terms of monetary policy, the Federal Reserve is expected to implement a 50 basis point cut next year. This adjustment is in response to the persistent inflation that the U.S. has been experiencing. The Core Personal Consumption Expenditures (PCE) inflation rate, which excludes volatile items like food and energy, is forecasted to decrease to 2.8%.
Despite this decrease, inflation remains a significant concern. To combat this persistent issue, the Federal Reserve may need to maintain a high federal funds rate. This strategy aims to curb inflation and stabilize the economy.
The International Monetary Fund (IMF) summarizing the findings of their 2023 Article IV Mission to the United States. Here are the key points:
1. **Resilient Demand and a Robust Labor Market**: The U.S. economy has shown resilience despite significant tightening of fiscal and monetary policy in 2022. Consumer demand has been strong, supported by a drawdown of pent-up savings and solid growth in real disposable incomes. The labor force participation of prime-age workers has risen above its pre-pandemic peak, and the unemployment rate for women and African Americans has fallen to historical lows. Real wages have been rising faster than inflation since mid-2022.
2. **Persistent Inflation Problem**: The strength in demand and labor market outcomes has contributed to more persistent inflation. Goods inflation has leveled out and shelter price growth is expected to start moderating in the coming months. However, past nominal wage increases are now feeding into non-shelter services. Core and headline PCE inflation are expected to remain materially above the Fed’s 2 percent target throughout 2023 and 2024.
3. **Important Near-Term Risks**: The large and rapid increase in interest rates may not be sufficient to bring inflation back to target. There is a risk that the Federal Reserve will have to raise the policy rate by significantly more than is currently expected to return inflation to 2 percent.
4. **Fiscal Imbalances**: On a general government basis, fiscal policy is expected to be procyclical in 2023. With the economy operating well above potential and inflation a persistent problem, there is a strong case for greater fiscal restraint in 2023-24.
5. **Trade Policy**: Over the last few years, global concerns have been raised over the resilience of supply chains, including as relates to national security. The U.S. would be better served by maintaining the open trade policies that have been vital to boosting growth.
6. **Financial Stability Risks**: Recent bank failures highlight the potential systemic risks posed by even relatively small financial intermediaries. High leverage, liquidity and duration mismatches, as well as interconnectedness between banks and non-bank financial institutions pose additional risks.
7. **Supply Side Reforms**: A range of policies were proposed in the President’s budget that would help address supply side constraints to growth. These include tackling poverty, incentivizing greater labor force participation, expanding healthcare coverage, increasing access to education, improving progressivity, and revising the global minimum.
Source: United States of America: Staff Concluding Statement of the 2023 Article IV Mission (imf.org)
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