The economic recovery is so sluggish that the Federal Reserve needs to keep easy money policies in place while the government comes to grip with its debts, the International Monetary Fund said on Monday.
A credible strategy to stabilize public debt in the medium term and a down payment on fiscal consolidation in 2011 are urgently needed, the IMF said in its World Economic Outlook.
The issue of how to ratchet down the U.S. debt is at near fever-pitch politically, with opposition Republicans in Congress trying to compel the Obama administration to deeper spending cuts.
A government shutdown was narrowly averted at the weekend when negotiators for the Republicans and Democrats reached a final-hour compromise, only to pivot toward a new budget battle that will hinge on the sensitive issue of a fast-approaching deadline for raising the legal U.S. borrowing limit.
In a sign of market nervousness about U.S. indebtedness, the world's largest bond fund PIMCO started betting against U.S. government debt last month, a statement on its holdings indicated.
IMF SEES SLUGGISH RECOVERY
The IMF noted that the U.S. budget deficit in 2011 is expected to hit 10.75 percent of national output, the highest among the developed economies.
The United States remains committed to meeting the G20 target of halving the deficit between 2010 and 2013, but the high deficit this year may make this difficult, it said.
In response, the U.S. Treasury reaffirmed that it plans to push ahead in efforts to cut gaping deficits.
We will meet our commitments to the G20 in Toronto and look forward to working with Congress to establish a credible, multiyear path to ensure our fiscal sustainability while delivering strong economic growth, a spokeswoman said.
U.S. President Barack Obama on Wednesday will lay out a long-term plan for deficit reduction. The administration has been wary of tightening the budget too precipitously for fear of undermining the economy's recovery.
The IMF said the economy should expand 2.8 percent in 2011 and 2.9 percent in 2012. The 2011 forecast was revised down from 3 percent growth the IMF forecast in January, but 2012's forecast was revised up from a previous 2.7 percent.
It stressed that risks to its forecast abounded, including a spike in oil and commodity prices, Middle East and North African political unrest, debt problems in Europe and the persistent downward pressure on U.S. home prices.
The IMF noted there still was substantial slack in the economy. It said that suggested inflation would stay subdued and it called for keeping interest rates low.
The right policy mix for the United States is one of continued monetary accommodation alongside moves to put fiscal balances on a stronger footing, the IMF said.
The U.S. Federal Reserve has held overnight rates near zero since December 2008 and is on course to complete a $600 billion bond-buying program by the end of June.
CANADA 2011 GROWTH FORECAST CUT
In the case of Canada, the IMF revised down its 2011 growth estimate to 2.8 percent from January's 2.9 percent forecast but foresaw 2012 growth of 2.6 percent instead of the 2.3 percent it thought earlier.
It said the strength of Canada's dollar currency, known as the loonie, was a drawback for the country's growth prospects. Canada also faces a risk from a possible deterioration in strong housing markets and hefty levels of household debt.
It praised Canadian authorities for having proposed a sound and credible plan to return to budget surpluses beginning in fiscal year 2015 but cautioned that an aging population and rising health care costs will require more effort to keep the country's finances stable.