The IMF calls on the United States to seek a definitive solution to the debt ceiling

History repeats itself. The United States Treasury has reached the authorized debt limit and the parties are negotiating a solution against the clock. Uncertainty and the specter of a possible default generates instability in the market and weighs down the economy. The International Monetary Fund (IMF) has requested this Friday in Washington an immediate solution to the pressing problem, but also a permanent remedy so that the debt crisis does not repeat itself on a recurring basis.

After meeting with the secretary of the treasury, Janet Yellen, and with the president of the Federal Reserve, Jerome Powell, the managing director of the IMF, Kristalina Georgieva, has insisted on the need to find a solution in the press conference in which she has presented the findings of its annual review of the US economy.

“Getting a good result is paramount from a global perspective. We think of US Treasury debt as an anchor for the global financial system. And this anchor needs to stay strong. So at a time of significant uncertainty, let’s not add a self-inflicted wound to those already suffered by the global economy. There is some encouraging news that the discussions are moving forward. But the world is watching and the world is saying, ‘Okay, let’s close this. And please, can you come up with a different way of approaching this issue?” Georgieva said.

“In addition, a more permanent solution to this recurring confrontation should be found through institutional changes that guarantee that, once the credits are approved, the corresponding space in the debt ceiling is automatically provided to finance this expense”, indicates the IMF in its statement. of conclusions.

persistent inflation

The IMF has raised the growth forecast for the United States by one tenth for this year, to 1.7%, and lowered that of next year by one tenth, to 1%, compared to the April forecasts. Its experts highlight that the economy has shown its resistance to the significant tightening of fiscal and monetary policy that took place in 2022 and has avoided recession so far. Consumer demand has held up particularly well, driven initially by the retraction of pent-up savings and, more recently, by robust growth in real disposable income thanks to job creation and wage increases.

The cross of the coin is that inflation refuses to subside and will remain “substantially above” the 2% target this year and next, estimates the IMF. “Getting inflation firmly back on target will require a prolonged period of tight monetary policy, with the fed funds rate remaining at 5.25-5.5% until the end of 2024,” ensures. These are higher interest rates for longer than the market currently expects.

The Fund warns that the broad and rapid rise in interest rates that has already been put in place may not be enough to bring inflation back to target quickly. “With much of the debt held by households and businesses held at relatively long terms and at fixed rates, household consumption and business investment have proven less sensitive to interest rates than in previous tightening cycles,” explains the IMF.

recession risk

In addition, a more aggressive increase in interest rates could reveal more serious and systemic problems than those observed to date in the balance sheets of banks, non-bank entities or companies, according to the agency, which believes that the consequent “tightening of conditions Financial institutions could trigger an increase in bankruptcies, worsen credit quality and increase stress on those entities with high levels of leverage and large short-term gross financing needs.

tax adjustment

The IMF warns that the United States needs a fiscal adjustment so that its debt is sustainable, of no less than 5 points of GDP. The IMF believes that such an adjustment will be impossible if families earning less than $400,000 a year are to be excluded from tax increases and no changes are made to social security and Medicare.

There are recipes to reduce the deficit by way of collection and the Fund leaves a wide menu of proposals. “Revenues could be increased through a broad-based federal excise tax, a carbon tax, increased taxation of corporations and high-income individuals, reduction of misdirected tax expenditures (such as those related to welfare employer-provided healthcare, sale of primary residence, mortgage interest, and state and local taxes), closing tax loopholes, lowering the minimum threshold for estate tax, and further improving the administration of income”, he indicates in his conclusions.

Finally, the IMF encourages the United States to make more efforts in the fight against climate change and criticizes the protectionist economic policy that it is carrying out with its aid: “The Inflation Reduction Act, the CHIPS Act and the Build Act America, Buy America have provisions explicitly designed to favor goods and services produced in the United States or North America. Although these measures are intended to increase the security and resilience of supply chains, these protectionist provisions distort trade and investment and risk creating a slippery slope that fragments global supply chains and triggers retaliatory action by trading partners,” says the Fund.

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