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Posts Tagged ‘IMF view on policies under the Financial Stability Plan’

IMF Sees U.S. Risks Tilted to the Downside

Posted by Larry Doyle on July 31st, 2009 11:38 AM |

The 2nd quarter GDP report this morning is surprisingly strong at a better than expected -1%. Are we supposed to disregard the significant downward revision (-5.5% to -6.4%) for 1st quarter GDP? Can we go somewhere to get an unbiased macro view of the U.S. economy?

It just so happens the International Monetary Fund released a review of our domestic economy this morning. This report, United States: 2009 Article IV Consultation, provides a rather sobering outlook as we continue navigating our economic landscape.

What do we learn?

>>financial strains are still elevated and the outlook remains for only a gradual recovery, with risks still tilted to the downside.

>>Policies under the Financial Stability Plan, notably the SCAP stress test, debt guarantees, and capital injections, have contributed to a significant improvement in financial conditions. However, risks persist, notably the risk that a prolonged recession could further erode capital. This situation warrants continued close monitoring and regular stress tests to evaluate vulnerabilities. The proposed reserve for stabilization funds should be retained, with the resolution framework for systemic nonbanks expeditiously implemented to improve the predictability and flexibility of crisis management. Balance-sheet cleaning remains a priority; the PPIP will provide a tool, although its usage may be limited. Recent steps to facilitate mortgage modifications are welcome, but more steps may be needed to encourage writedowns of underwater mortgages.

>>Monetary policy should remain highly accommodative until recovery is clearly underway. If downside risks materialize, additional credit easing and a strengthened commitment to maintaining a highly accommodative stance could be deployed. Additional fiscal stimulus could also be used, provided it were set within a credible medium-term fiscal framework.

>>For the Fed, a diverse set of tools will be needed to afford maximum flexibility in light of uncertainties about how market conditions will evolve and about the extent to which particular instruments can be used. In addition, Maiden Lane facilities should be transferred to the Treasury at an early stage, to reduce the Fed’s exposure to credit risk. On support to financial institutions, terms should be tightened on facilities that need to be extended, to avoid distortions, fiscal risks, and governance issues. Clear communication of the strategy would bolster market confidence, and international coordination will be warranted as well.

Recall that Maiden Lane was a facility used by the Fed to house Bear Stearns assets in the process of JP Morgan’s takeover of that firm. Sounds like the IMF has some concerns! (more…)






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