Bad news, America: IMF says full employment years away, cuts 2014 growth forecast to 2%

Washington: The International Monetary Fund cut its growth forecast for the United States on Monday and said the economy would not reach full employment until the end of 2017, allowing the Federal Reserve to bide its time before raising interest rates.

In its annual health check of the U.S. economy, the IMF also urged the United States to boost the minimum wage, which is below most international standards, to fight poverty, which lingers above 15 percent.

The IMF forecast economic growth of 2 percent this year, below the 2.8 percent rate it predicted in April, due to a weak first quarter. It kept its 2015 forecast unchanged at 3 percent.

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“Recent data … suggest a meaningful rebound in activity is now underway and growth for the remainder of this year and 2015 should well exceed potential,” the IMF said.

Yet the country’s potential growth should only be around 2 percent going forward, below historical averages, as the population ages and productivity growth slows, it added

“Given the substantial economic slack in the economy, there is a strong case to provide continued policy support,” the IMF said.

It said its forecasts show the U.S. economy would only return to full employment by the end of 2017, with inflation remaining low, suggesting the Fed could keep rates at zero for longer than the middle of 2015.

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The IMF urged the United States to increase spending on infrastructure and education and change parts of its tax system, including boosting the federal gasoline tax and reinstating the tax credit for research and development, to help spur growth.

In the future, the United States should also reform corporate taxes, introduce a carbon tax and move toward a federal value-added tax, the IMF said.

A greater reliance on growth-enhancing fiscal policies could allow the Fed to retreat more quickly from its extraordinary monetary stimulus, it added.

“This would be the best policy mix from an economic perspective but, regrettably, political agreement on such an approach remains elusive,” the IMF said.

The IMF warned that financial markets could be too complacent about possible volatility surrounding a future rate hike. Markets predict a narrow range of future policy rates, despite uncertainty about the amount of slack in the U.S. labor market and the potential for wage and price inflation.

“This sets up the risk, even with a successful and well-communicated increase in interest rates, for significant swings in market flows and prices in the months ahead,” the IMF said.

It said the Fed should consider further changes to its communication to better guide markets, including holding a news conference after each meeting of its policy-setting committee and publishing quarterly reports on monetary policy.

“Finally, the (Fed’s policy-setting panel) could provide greater clarity about how financial stability considerations figure into its monetary policy calculus,” the IMF said. Fed policymakers meet on Tuesday and Wednesday to consider their monetary policy stance.

As in previous reports, the IMF warned a prolonged period of ultra-low U.S. interest rates raises financial stability concerns, pointing especially to fragmented oversight of the U.S. insurance sector.

Reuters