Finance & Business World

The U.S. economic recovery is likely to be “gradual” and officials should be prepared to inject more monetary and fiscal stimulus should the rebound falter, the International Monetary Fund said.

“If downside risks materialize, additional credit easing and a strengthened commitment to maintaining a highly accommodative monetary stance could be considered,” the IMF’s board said in a statement released today. “Additional fiscal stimulus could also be used, although the immediate focus should be on implementing the current fiscal measures and monitoring their impact.”

Directors welcomed the U.S. authorities’ “strong and comprehensive policy measures” that have helped ease the pace of economic contraction. Still, they said they expect a “gradual” recovery, with risks “tilted to the downside” and warned that potential growth “could remain well below past trends for a considerable period.”

Gross domestic product shrank at a slower pace in the second quarter, contracting at a less-than-projected 1 percent annual rate after shrinking 6.4 percent in the prior three months, the most in 27 years, Commerce Department figures showed today in Washington. Revisions showed the economic downturn last year was even deeper than previously estimated.

The IMF directors’ statement was released as part of the annual “Article IV” assessment of the U.S. economy.

Recovery Timeline

Charles Kramer, head of the IMF’s North America division, said in an interview on Bloomberg Television that the lender predicts the world’s largest economy will start “recovering decisively” by the middle of next year. The nation’s unemployment rate will peak above 10 percent in 2010, he said.

The IMF forecasts the world’s largest economy will contract 2.6 percent this year before expanding 0.8 percent in 2010. In the staff report that directors used as a basis for discussion, the fund said the dollar was “moderately overvalued, although the assessment was subject to unusually high uncertainty cash advances.”

At the same time, directors called it a “key priority” to craft “comprehensive exit strategies to unwind the extraordinary crisis-driven interventions, once a sustainable recovery is under way.” Clear communications on such plans, combined with international coordination, would help market confidence, they said.

The U.S. needs an “ambitious medium-term fiscal consolidation” with adjustment that “would most likely need to focus on the revenue side.”

Fiscal Shortfall

The U.S. budget gap, at 13.5 percent of gross domestic product, will be the largest of the world’s top 20 advanced and emerging economies, the IMF said in a report yesterday.

A transfer to the U.S. Treasury of the Federal Reserve’s so-called Maiden Lane companies, the three entities it set up in 2008 to hold investments acquired in the rescues of Bear Stearns Cos. and American International Group Inc., “would reduce its exposure to credit risk,” the IMF said.

While financial conditions have improved, directors called cleaning balance sheets “a priority,” adding that “more steps might be needed to encourage writedowns of underwater mortgages.”

Restarting private securitization is also “crucial,” the fund said, supporting the government’s proposals such as “improving disclosure about the ratings process and underlying credit quality” or “differentiating ratings for securitized products.”

The directors commended the U.S. administration’s proposals for strengthening regulation, seeing “scope for further actions.” Some directors “also encouraged consideration of regulations aimed at discouraging size and complexity.”

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