The slowdown in activity in the United States has been less than feared, and recovery should begin next year as important headwinds are overcome, the IMF began, going on to state that:

"Considering the severity of the shocks that have hit, the economy has held up well so far, with substantial monetary and fiscal stimulus, buoyant net exports, and healthy corporate balance sheets all providing welcome support."

"However, their effect is being blunted by growing strains on household and bank finances, and now also by higher commodity prices. These strains, which have yet to fully feed through to domestic demand and activity, will take time to work out."

According to the IMF, against this uncertain background, the main policy challenges are:

• To provide measured support to economic activity while keeping inflation expectations anchored;
• To reform financial regulation and supervision to improve liquidity management, enhance capital provisions, and reduce systemic risk; and
• To implement over time the multilateral strategy, with demand rebalanced to sustain growth while reducing the external current account deficit.
  

Additionally, timely fiscal stimulus, and the operation of automatic stabilizers, are providing welcome support to activity at a critical time.

Tax rebate checks have been going out to low- and middle-income individuals since late April, which will temporarily boost aggregate demand at a time when oil and food prices are weighing on consumers' purchasing power.

However, medium-term pressures on the budget limit the room for further discretionary fiscal expansion. While it is encouraging that the Administration and Congress are aiming for budget balance over the medium term, these plans do not yet provide for war-funding authority beyond FY2009 or the costs of overriding legislated actions such as hikes in the alternative minimum tax and cuts in Medicare compensation, the IMF report observed.

Despite the easing in financial market conditions since the crisis last March, important risks remain. The Fed's widening of access to its discount window following the collapse of Bear Stearns has lowered systemic risks, but has not eliminated them.

Were the fragile conditions of last March to recur, the new facility for lending Treasury securities against asset-backed securities could be adapted with due regard to moral hazard considerations.

For example, the maturity of securities loans could be lengthened significantly, as has been done with government backing in the United Kingdom.

The IMF went on to add that: "The Treasury blueprint provides a sensible basis for comprehensive reform and simplification of the regulatory system. The extension of the public safety net to primary dealers, notably the major investment banks, after the collapse of Bear Stearns has underlined the importance of effective systemic regulation."

"While dollar depreciation has moved US competitiveness closer to medium-term fundamentals, tensions remain given the pattern of adjustment. Bilateral rate movements have not corresponded to the existing pattern of imbalances, with larger changes against freely-floating currencies (such as the euro) than against currencies of countries with large current account surpluses (such as the renminbi)."

"Thus, the reduction in tensions in the international exchange rate and trade system has been more limited than suggested by the dollar's real effective rate."

"This underlines the importance for both the US and its trade partners to make further progress in implementing the agreed multilateral strategy to reduce external imbalances, rebalancing demand in a manner that sustains growth. On the US side, it is appropriate that planned fiscal consolidation is being delayed to support growth."

In conclusion, the IMF announced that the US authorities are to be congratulated on their rapid and innovative responses to a complex crisis, but warned that significant challenges lie ahead.

The policy reactions will help minimize disruption not only in the United States, but across the world.

These actions will need to be supplemented by broader efforts in major countries to foster stability in international financial markets and maintain an open trading system in the period ahead, the Fund suggested.