IMF says balance of risks to US economy tilted to the downside

The International Monetary Fund (IMF) has warned that the fiscal deficit reduction in the US this year is “excessively rapid” and that the Federal Reserve must be very careful when tapering down its quantitative easing programme (release).

In its conclusion of the Article IV consultation, the IMF said that the US recovery has remained “tepid” and the balance of risks to the outlook appear “modestly tilted to the downside”. While the banking system is looking healthier than it did last year, policymakers would need to watch closely vulnerabilities emerging from persistently low interest rates.

In particular, the directors mostly agreed that the fiscal deficit reduction in 2013 is happening too quickly, and that the automatic spending cuts intended to limit the size of the federal budget could reduce growth in the short term and potentially lower growth in the medium-term.

There was also a broad consensus on the need for an accommodative monetary policy, but admitted that a long period of very low interest rates could have “unintended consequences” for financial stability – meaning that “strong macro-prudential oversight and supervision of the financial system remain essential”.

The winding down of quantitative easing must be effectively communicated and timed to minimise risk of excessive interest rate volatility.

Directors noted that while the current account deficit has declined, the U.S. external position remains weaker than justified by fundamentals and desirable policies. A gradual but sustained reduction in the fiscal deficit, together with a strengthening of growth in partner countries, would help achieve the desirable strengthening of the current account.

Here's what the IMF said in its Article IV report on Europe.