The International Monetary Fund on Monday said a heavy dose of stimulus would ease the U.S. recession this year and lift growth marginally in 2010.
The IMF said the U.S. dollar was only modestly above the level implied by medium-term fundamentals and its value would depend on foreign appetite for U.S. assets.
In its annual consultation with the United States, the IMF said U.S. policy-makers were correct to keep stimulus flowing for now, but would need to develop a well-defined exit strategy and turn their attention to the threat of ballooning deficits once the worst of the crisis has passed.
We see some good signs but there are still sizable challenges ahead that still require forceful and decisive attention, the IMF's First Deputy Managing Director John Lipsky told a news conference to discuss the report.
The IMF said a combination of financial strains and ongoing adjustments in the housing and labor markets would likely restrain growth, with a solid recovery projected to emerge only in mid-2010.
The Fund projected the U.S. economy would contract by 2.5 percent this year, with a modest expansion in 2010 of 0.75 percent. This compares to the IMF's April forecast for the United States, which projected the economy to shrink by 2.8 percent in 2009 and show zero growth next year.
It said Washington's fiscal boost would lift annual gross domestic product by 1 percent in 2009 and 0.25 percent in 2010.
It said core U.S. inflation would decline to very low levels and possibly bottom at around 0.5 percent in 2010 before it starts to rise.
Lipsky said the U.S. administration's policy response to the crisis had been strong and comprehensive, and recent data showed the decline in economic activity had slowed and financial conditions have improved.
Still, the outlook for the U.S. economy was unusually uncertain, the IMF said, and if activity failed to pick up as expected next spring, additional fiscal stimulus measures should be considered while the U.S. Federal Reserve should maintain its current level of low interest rates.
The biggest risks to the outlook were a possible rise in house foreclosures, further home price declines and additional financial turmoil, the Fund added.
CHALLENGES TO FULL RECOVERY
The IMF said the U.S. administration faced three related challenges: first, to complete fiscal and monetary measures to support a sustained recovery; second, develop a strategy to unwind massive public interventions; and third, address the long-term legacies of the crisis through fiscal and financial reforms.
As the economy starts to pick up, the IMF said the U.S. should develop and communicate an exit strategy to withdraw monetary stimulus and ensure international coordination.
The IMF forecast that over 2009-2011 the federal deficit will average 9 percent of gross domestic product and that debt held by the public will nearly double to 75 percent of GDP.
It said the administration's fiscal year 2010 budget lays out appropriate objectives but cautioned that it was based on an optimistic economic outlook.
Our estimates suggest that significant additional measures will be needed over time to ensure that these long-term targets are met, Lipsky told reporters.
Looking forward, Lipsky said it was vital that the United States introduces measures to ensure such a crisis does not occur again and welcomed the administration's proposal for a systemic risk regulator.
He said the IMF would evaluate the U.S. financial and regulatory system under the IMF's Financial Sector Assessment Program, or FSAP, starting in the fall. It is the first time that the U.S. has signed on to the IMF program, which aims to promote financial stability.
(Reporting by Lesley Wroughton; Editing by Andrea Ricci)