A plausible baseline scenario might include a soft landing in China and growth in other emerging markets moving gradually back up to underlying trends. Of course, it is possible that a recovery in emerging market growth occurs sooner than in the baseline, such that the U.S economy moves modestly more quickly toward our goals.
Of course, these two challenges are mutually reinforcing: the markets’ skepticism about the medium-term fiscal position makes it more difficult to roll over debt, while the higher debt-refinancing costs make it more difficult to balance the budget. Thus, both problems have to be addressed in a credible manner.