## cr18207

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**Canonical URL:** [cr18207](https://www.imf.org/-/media/files/publications/cr/2018/cr18207.pdf)

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---

### Determinants of U.S. Wage Inflation
- Key findings:
  - U.S. wage growth subdued since end of the great recession despite robust job growth and a steady fall in unemployment.
  - Wage Phillips-curve estimates attribute weak wage growth mostly to low labor productivity growth.
  - Model fits data well; parameters robust across measures of labor market slack and show no structural instability.
  - Decomposition over the recovery:
    - Diminishing downward pressure on compensation growth as labor market slack has diminished.
    - Easing of slack-related drag offset by a contemporaneous decline in labor productivity growth of similar size.
  - Additional suppressors of real compensation growth: technological progress (automation of routine tasks), trade globalization, falling unionization rates.
- Micro-econometric (CPS-based augmented Mincer model):
  - Controls for education, gender, profession.
  - Higher local unemployment puts downward pressure on wages; relationship weakened post great recession.
  - Structural changes:
    - College-educated workers in routinizable jobs face greater downward pressure.
    - Less-educated workers experience largest downward pressure when in jobs easiest to offshore.
    - Working in more concentrated industries weighs on wages for both college and non-college workers.
  - Magnitudes reflect movements from median routinizable/offshorable occupation to 66th percentile and a 10-percentage point move of workers to large firms within same industry.
- Interpretation and implications:
  - Aggregate wage dynamics reflect cyclical (diminishing slack) and structural (low productivity, automation, globalization, concentration, union decline) forces.
  - As slack diminishes, modest rise in wages and unit labor costs anticipated; pace depends critically on productivity and structural drivers.
- Research references cited:
  - Y. Abdih and S. Danninger, 2018 “Understanding U.S. Wage Growth”, IMF Working Paper, WP/18/138.
  - Y. Abdih and S. Danninger, 2017 “What Explains the Decline in the U.S. Labor Share of Income? An Analysis of State and Industry Level Data,” IMF Working Paper WP/17/167.

### Nonlinear versus linear Phillips Curve: model results (1.5 percent impulse)
- Context:
  - A 1.5 percent impulse (comparable to the impulse from the 2018–19 fiscal expansion) analyzed in FRB/US and G20 MOD models.
- Qualitative result:
  - Results for the two models qualitatively similar.
- Key dynamics:
  - Policy rates rise faster and higher when slack–inflation trade-off is characterized by a nonlinear Phillips Curve.
  - Tighter U.S. and global financial conditions relative to the linear case.
  - Despite higher policy rates in the nonlinear case, the inflation path is higher than in the linear case.

### Term structure of interest rates and forecasting structural variables (Box 3)
- Observation: Term premia very low and sometimes negative; attributed to low inflation, above trend growth, and possibly Fed QE.
- Model findings:
  - Expectations about structural factors (long-run inflation expectations, equilibrium real interest rate) revise slowly after large shocks.
  - Most yield variation explained by term premia and, to a lesser extent, economic conditions rather than shifting long-run expectations.
- Market-embedded forecasts from the model:
  - Unemployment projected to drop to around 3½ percent before trending back to long-term natural level.
  - Policy rate expected to modestly overshoot its long-run expected value.
  - Long-term rates expected to rise to around 3.7 percent.

### Household saving, business investment, and U.S. current account (Box 4)
- Personal saving:
  - Secular decline since mid-1970s; trend reversed after financial crisis and more recently resumed.
  - Time-series VECM finds little evidence of a post-financial crisis break in elasticities between consumption, disposable income, and net worth; coefficients stable over 50 years.
  - 2008–13 rise in personal saving rate mainly due to disposable income path, higher unemployment, and fall in wealth.
  - Forecast: Household saving rate predicted to continue falling and revert to pre-2007 secular downtrend conditional on staff medium-term forecasts.
- Business investment:
  - Lackluster despite record corporate profits, supportive financial conditions, robust sentiment.
  - Econometric finding: Weak expected demand growth explains most sluggish capital formation since the financial crisis; decline in global oil prices weighed on aggregate investment from 2014 onward.
  - Outlook: Investment should strengthen with solid future demand growth and recovery in oil and gas sectors.
- Implications for current account:
  - Upward growth revisions → rise in investment-GDP.
  - Strong disposable income and wealth gains → further decline in saving rate.
  - Worsening public sector saving-investment balance.
  - Combined effect: Expected increase of around 1 percent of GDP in the U.S. current account deficit (bringing it to highest level since global financial crisis).

### Monetary policy guidance and risks
- Fed response to fiscal stimulus:
  - Fed needs to raise policy rates at a faster pace to achieve dual mandate.
  - Fed should be ready to accept modest, temporary overshooting of medium-term inflation goal.
  - Even with modest overshooting, policy rates likely need to rise for a time above long-run neutral rate.
- FOMC and staff projections:
  - FOMC participants’ median forecast implies core inflation and federal funds rate will rise at a moderately slower pace than staff forecasts.
- Balance sheet normalization:
  - Barring significant negative shock, normalization should proceed as outlined in Fed guidance.
- Communication recommendations:
  - Continue data dependence and clear communication.
  - Suggest scheduling a press conference after every FOMC meeting and publishing a quarterly monetary policy report detailing central scenario and risk description.
- Spillovers:
  - Near-term net effect of higher U.S. growth and expected higher U.S. rates likely beneficial for most economies; largest positive spillovers to Canada and Mexico.
  - Potential stress for leveraged firms and households and for indebted sovereigns; some strains already evident.
- Authorities’ assessment:
  - Risks roughly balanced; gradual federal funds rate increases consistent with solid expansion and inflation near 2 percent objective.
  - Little empirical evidence that Phillips Curve is steeper at lower unemployment; supply-constraint-driven pressures remain an important risk.
  - Federal funds rate path will depend on incoming data.

### Key macroeconomic projections and indicators (select figures from source)
- Real GDP Growth (annual average): IMF 2.6 (2018), 2.3 (2019), 1.7 (2020), 4.1 (2021).
- PCE Inflation (Q4/Q4) and Core PCE Inflation (Q4/Q4): IMF 1.5 and 1.5.
- Federal Funds Rate (eop): IMF 1.5.
- Budget balance (federal government, percent of GDP): IMF -2.1.
- Debt held by the public (federal government, percent of GDP): IMF 76.5.
- Output Gap (percent of potential, annual average): IMF -4.1, -4.6, -4.5, -4.7 (multi-year entries present in source).

### Restoring fiscal sustainability and rebuilding fiscal space
- Targets:
  - Raise primary fiscal surplus of general government to around 1¼ percent of GDP (1½ percent of GDP for federal government) to put debt-to-GDP on downward path.
- Strategic guidance:
  - U.S. has some fiscal space but should not use it at this stage in the cycle.
  - Recommended policy measures:
    - Reform social security: raise income ceiling for contributions; index benefits to chained inflation; accelerate planned retirement age increase.
    - Contain healthcare cost inflation: technological efficiency, greater cost sharing, change provider remuneration.
    - Increase federal revenue-GDP ratio: broad-based carbon tax, federal consumption tax, higher federal gas tax.
- Intended outcomes:
  - Allow public debt-to-GDP to fall; create space for support to low- and middle-income families, investments in human and physical capital, and higher medium-term growth.
- Near-term implication:
  - Gradual tightening likely restrains growth below staff baseline; successful supply-side policies could raise potential and actual growth medium-term.
- Infrastructure financing:
  - Increasing federal infrastructure spending urgently needed; fiscal space must be created.
  - Recently approved 2018-19 budget bill provides little incremental infrastructure funding despite US$200 billion appropriation requested by administration.

### Macro-structural policies to boost potential growth (Box 5)
- Tackling poverty:
  - Expand eligibility and generosity of Earned Income Tax Credit (EITC); combine with higher federal minimum wage.
  - Simplify/unify social assistance, increase direct transfer generosity, avoid “cliffs,” target payments to outcomes.
- Improving education:
  - Prioritize early childhood education; institute universal pre-K.
  - Support STEM; redesign public school funding to reduce disparities; more resources to high-poverty districts.
  - Expand apprenticeship and vocational programs; alternative tertiary financing (income contingent loans, expanded needs-based grants).
- Family benefits and labor force:
  - Institute paid family leave; provide means-tested child and dependent care assistance; undertake skills-based immigration reform.
- Better healthcare:
  - Protect coverage gains; pilot programs and technologies to increase efficiency and pricing transparency; assess antitrust or other solutions where concentration increased.

### Tax policy overview, 17. core findings and recommendations
- General:
  - Approved tax policy changes have high budgetary cost while federal budget needs revenues.
  - Temporary provisions create tax policy uncertainty.
  - Authorities should prevent reforms from adding to fiscal deficit by increasing revenue-to-GDP ratio, largely through greater reliance on indirect taxes.
- A. Business Tax:
  - Positives: reduction of statutory business tax rate to around OECD average; expensing of certain capital spending incentivizes investment.
  - Concerns:
    - Deductibility of interest with a cap remains; cap procyclical and may exacerbate strains.
    - Temporary expensing provision distorts timing of investment.
    - One-time low tax on unrepatriated profits confers significant benefit.
    - Preliminary evidence: U.S. multinationals increased plans for share buybacks and dividend payouts.
  - Policy preference: Move toward a cashflow tax—permanently allow expensing of all capital outlays and fully eliminate interest deduction for new debt.
- B. Personal Income Tax:
  - Positives: elimination of most itemized deductions, higher standard deduction, elimination of personal exemptions, limits on SALT deduction, lower cap on mortgage interest deduction.
  - Distributional concerns: net effect provides greater benefits to upper deciles; may exacerbate income polarization; relative burden on low- and middle-income households rises as provisions expire.
  - Policy recommendations:
    - Recalibrate rate structure to concentrate relief to those at or below median income; phase out relief above 150 percent of median income.
    - Increase coverage and generosity of EITC.
    - Eliminate loopholes and special regimes for high-income earners (including carried interest).
- C. Pass-Throughs:
  - 20 percent deduction for pass-through income can be used by high-income individuals to recharacterize income and reduce tax.
  - Around one half of U.S. corporate tax base is pass-throughs; undermines equity and simplification goals.
  - TCJA guardrails exist but effectiveness unclear.
- D. International Provisions:
  - Shift from global taxation with deferral to modified territorial system with anti-avoidance measures and minimum tax on offshore profits.
  - Recommendations to strengthen design:
    - GILTI: impose on country-by-country basis rather than on average global profits.
    - FDII: eliminate lower tax rate for exporters to avoid distortions.
    - BEAT: apply BEAT only to transactions designed to transfer profits to related parties in low-tax jurisdictions.
- E. International tax spillovers:
  - Move to territoriality may shift profits/investment to lower tax jurisdictions; reduced U.S. statutory rate and export preferences may counteract.
  - GILTI likely to discourage offshore jurisdictions from cutting rates below 13.125 percent.
  - Other jurisdictions may respond with faster depreciation/expensing, BEAT-like measures.
- Authorities’ views and administration modeling:
  - Administration projects approximately a 2.9 percent real GDP growth rate over 10 years in Fiscal Year 2018 Budget.
  - Administration’s policies (relative to baseline) would add around 0.7 percent to annual real GDP growth rate over 10 years (about half from corporate tax changes).
  - Short-term reported outcomes: over six million American workers received bonuses, wage increases, or other benefits after signing the Act.

### Trade policy — actions, risks, and recommendations
- Recent actions:
  - Investigations under Section 232 (aluminum, steel) and Section 301 (China); review of “Buy American”; renegotiations of NAFTA and KORUS.
- Tariffs imposed:
  - 25 percent on steel and 10 percent on aluminum (exemptions: Australia and Argentina both metals; Brazil and South Korea steel only).
  - Safeguard tariffs under Section 201 on washing machines and solar panels.
  - Proposed tariffs on around US$150 billion of imports from China; China proposed tariffs on US$50 billion of U.S. products.
  - U.S. temporarily put on hold proposed tariffs on China; initiated Section 232 auto investigation.
- Risks:
  - Retaliatory responses, uncertainty, investment discouragement.
  - Use of national security rationale could undermine rules-based trading system.
  - Disruption of supply chains harming multinationals and trade-affected workers.
- Recommended approach:
  - Work constructively with partners, avoid specific bilateral trade balance targets, pursue multilateral/plurilateral agreements, mitigate worker consequences via training, income support, job search assistance, expanded trade adjustment assistance.

### Box 6 — Impact of a Successful Renegotiation of NAFTA (scenario and quantitative results)
- Scenario assumptions:
  - Elimination of all tariffs between three signatories.
  - 1-percent increase in goods trade efficiency.
  - 25 percent reduction in service trade inefficiencies.
  - Reduction in compliance costs from rules of origin.
- Aggregate results:
  - Real GDP increases in all three countries.
  - Trade among three countries increases by 4 percent overall.
  - Percentage Change in Real GDP due to Successful NAFTA Renegotiation: 0.37 (Canada), 0.27 (Mexico), 0.05 (United States).
  - Canada’s bilateral trade surplus with the U.S. falls by 25 percent.
- Sectoral impacts:
  - Apparel and textile growth in Mexico; apparel and motor vehicles net gainers in Canada; dairy and textiles expand in U.S.; motor vehicles and auto parts increase in all three.
- Rules-of-origin sensitivity:
  - Tighter automotive rules-of-origin offset some positive effects; Mexico’s auto industry most negatively affected.

### Financial oversight, regulatory changes, and FSAP staff appraisal (Section 32)
- Major reforms:
  - Asset threshold raised to US$250 billion for BHC systemic classification; Fed may deem BHCs with US$100–250 billion systemic.
  - Recommendation: continue stress-tests for banks with assets between US$100–250 billion.
  - Tailoring of Dodd-Frank: custodial assets excluded from Supplementary Leverage Ratio calculation; highly liquid municipal bonds included in HQLA (subject to limits); BHCs under US$10 billion exempt from Volcker rule.
  - Proposal to modify eSLR for GSIBs: set ratio at 3 percent plus buffer of 50 percent of risk-based capital surcharge.
  - Treasury proposals: streamlined bankruptcy for complex failures, circumscribe FDIC authority in resolution, increase FSOC designation transparency.
  - Volcker Rule simplification proposals advanced.
- Interaction and systemic risk:
  - Tailoring steps modest individually; interactions could be procyclical and amplify medium-term risks.
  - Medium-term vulnerabilities steadily building and elevated.
- Oversight of nonbanks:
  - Need strengthened oversight for insurance, money markets, repo, asset managers; introduce liquidity risk framework for asset managers.
  - Little progress on housing finance reform.
  - Data impediments hinder full understanding of system risks.
- Authorities’ views:
  - Aim to tailor regulation to institution size while preserving Dodd-Frank improvements.
  - Change eSLR to make risk-based capital binding; maintain orderly liquidation framework; use Economic Growth, Regulatory Relief, and Consumer Protection Act for relief to small/medium BHCs.
- Staff appraisal (concise):
  - Near-term: strong growth and job creation; next year: longest expansion in recorded history likely.
  - Medium-term: current policies boosting near-term prospects create vulnerabilities.
  - Fiscal policy: pursuing procyclical fiscal policy; recommendation to reverse planned expansion in fiscal deficit.
  - Monetary policy: fiscal stimulus implies Fed will need to raise policy rates faster and potentially above neutral for a time.
  - Tax policy: recommend increase revenue-to-GDP via indirect taxes; target personal income relief to those at/below median; move business tax to cashflow basis; redesign international provisions to target low-tax jurisdictions.
  - Trade policy: recommend constructive dispute resolution without tariffs.
  - Financial stability risks: high equity valuations, rising leverage, weakening underwriting, growth of passive products, cyber risk.
  - Outward spillovers: near-term boost to partners but higher future risks; tightening global conditions could pressure dollar-denominated borrowers.

### Macro outlook and key projections (selected time series and tables)
- Real GDP growth (percent change): 2016: 1.5; 2017: 2.3; 2018: 2.9; 2019: 2.7; 2020: 1.9; 2021: 1.7; 2022: 1.5; 2023: 1.4.
- Unemployment rate (percent): 2016: 4.9; 2017: 4.4; 2018: 3.8; 2019: 3.5; 2020: 3.4; 2021: 3.6; 2022: 3.6; 2023: 3.8.
- CPI inflation (q4/q4): 2016: 1.8; 2017: 2.1; 2018: 3.2; 2019: 2.7; 2020: 2.3; 2021: 2.2; 2022: 2.2; 2023: 2.3.
- Core PCE Inflation (q4/q4): 2016: 1.9; 2017: 1.5; 2018: 2.0; 2019: 2.3; 2020: 2.2; 2021: 2.0; 2022: 2.0; 2023: 2.0.
- Fed funds rate (period average): 2016: 0.4; 2017: 1.0; 2018: 1.9; 2019: 3.0; 2020: 3.6; 2021: 3.2; 2022: 2.9; 2023: 2.9.
- Federal balance (% of GDP), staff-adjusted: 2016: -3.2; 2017: -3.5; 2018: -4.1; 2019: -4.6; 2020: -4.5; 2021: -4.7; 2022: -5.0; 2023: -4.8.
- Federal debt held by the public (% of GDP): 2016: 76.7; 2017: 76.5; 2018: 76.9; 2019: 77.2; 2020: 78.5; 2021: 80.5; 2022: 82.5; 2023: 84.6.
- General government gross debt (% of GDP): 2016: 107.2; 2017: 105.6; 2018: 106.0; 2019: 106.5; 2020: 108.1; 2021: 109.9; 2022: 111.6; 2023: 113.1.

### Current account, REER, and external assessment
- Current account balance (% of GDP): 2016: -2.4; 2017: -2.4; 2018: -3.0; 2019: -3.2; 2020: -3.6; 2021: -3.4; 2022: -3.2; 2023: -3.0.
- Current account (US$ billions): 2016: -452; 2017: -466; 2018: -618; 2019: -698; 2020: -812; 2021: -799; 2022: -780; 2023: -756.
- EBA model entries:
  - Actual CA: -2.4
  - Cycl. Adj. CA: -2.2
  - EBA CA Norm: -0.7
  - EBA CA Gap: -1.5
  - Staff Adj.: 0.0
  - Staff CA Gap: -1.5
  - Staff assessment: 2017 cyclically-adjusted CA assessed to be 1.0 to 2.0 percent of GDP lower than level implied by fundamentals and desirable policies.
- REER assessment (2017 estimates):
  - REER appreciated about 18 percent between 2012 and 2016; depreciated about 0.6 percent in 2017; as of May 2018 depreciated about 3.5 percent relative to 2017 average.
  - Indirect EBA CA assessment (elasticity 0.12): REER overvalued by 12 percent.
  - EBA REER index model: overvaluation of 8 percent.
  - EBA REER level model: overvaluation of 14 percent.
  - External Sustainability Approach: REER overvaluation of 18 percent.
  - Staff overall assessment: 2017 average REER moderately overvalued in 8–16 percent range.
- Capital and financial accounts (2017):
  - Net financial inflows: about 1.8 percent of GDP (2016: 2.0 percent of GDP).
  - Net portfolio investments increased by 0.2 percent of GDP y/y; other investments increased by 0.8 percent of GDP y/y; offset by weaker net direct investments.
- Public Debt Sustainability (baseline projections):
  - Federal debt held by the public: about 77.4 percent of GDP in 2017; projected to around 95.6 percent of GDP in 2027.
  - General government gross debt: about 107.8 percent of GDP in 2017; projected to rise to 120 percent of GDP in 2027.
- Debt servicing and interest-rate outlook:
  - Effective interest rate currently 1 percent; projected to rise to 3.7 percent by 2027.
- Stress test sensitivity results:
  - 200 bps increase in sovereign risk premium → debt ratio ~130 percent of GDP by 2027 (about 10 percentage points above baseline).
  - Real GDP growth one standard deviation below baseline → public debt ~10 percentage points above baseline by 2027.
  - 1 percentage point of GDP larger fiscal deficit over next two years → public debt ~5 percentage points above baseline in 2027.
  - Combined macro-fiscal shock → public debt could reach as high as 145 percent of GDP by 2027.

### Risk Assessment Matrix — selected quantified risk
- Tighter global financial conditions:
  - Level of Concern: High; Likelihood: High; Expected Impact: Medium.
  - Quantified effect: "A 10 percent dollar appreciation is estimated to reduce GDP by around 0.5 percentage points in the first year and 0.5-0.8 percentage points in the second year. The current account deficit would also widen by around 1 percent of GDP."
- Structurally weak growth in key advanced economies:
  - Quantified effect: "A 1-percentage point decline in growth in advanced and emerging economies could subtract about 0.1 percentage points of U.S. GDP after two years."

### Annex IV — Implementation of FSAP Recommendations (selected statuses)
- Recommendation 1: Explicit financial stability mandate to all FSOC agencies — Status: Not implemented.
- Recommendation 2: FSOC Annual Report to include specific follow-up actions — Status: Partially implemented.
- Recommendation 3: Publish macroprudential toolkit and prioritize development — Status: Partially implemented.
- Recommendation 4: Expedite heightened prudential standards for designated non-bank SIFIs — Status: Partially implemented.
- Recommendation 5: Improve data collection and inter-agency data sharing — Status: Partially implemented.
- Additional implementation highlights:
  - FRB approved CCyB framework; affirmed CCyB at 0 percent in December 2017.
  - Pilot data collections on bilateral repos and securities lending completed; work ongoing.
  - Many FSAP recommendations on insurance, asset managers, liquidity stress testing, and housing finance remain partially implemented or not implemented.

### Regulation, supervision, and market structure (selected supervisory recommendations and statuses)
- Recommendation 6 ("Give primacy to safety and soundness") — Status: Partially implemented.
- Recommendation 7 (strengthen supervisory framework; single-counterparty credit risk proposal) — Status: Partially implemented.
  - Proposal applies differentiated exposure limits for BHCs by asset size; community banks (<$50 billion) not subject.
- Recommendation 8 (independent nationwide insurance regulator) — Status: Not implemented.
- Recommendation 11 (provide resources to SEC and CFTC) — Status: Partially implemented.
- Asset manager oversight:
  - SEC examined 11 percent of investment advisers in FY2016, 15percent in FY2017; expects 15percent in FY2018 and FY2019.
  - SEC adopted open-end fund liquidity risk management rules (October 2016); swing pricing permitted under certain circumstances.
- Triparty repo reforms — Status: Implemented (intraday credit reduced by over 95 percent; clearing bank funding limits imposed).
- Money market mutual funds:
  - Institutional prime MMMFs moved to floating NAV; retail and government MMMFs may retain amortized cost constant NAV with liquidity fees and gates.

### Swap data access and rulemaking (Section 21(c)(7) of the Commodity Exchange Act)
- Section 21(c)(7) directs swap data repositories to make swap data available to enumerated domestic authorities and any other entity CFTC determines appropriate, potentially including certain foreign authorities.
- CFTC adopted implementing rules in 2011 and proposed an amendment in January 2017 to make access more efficient.

### Tax reform — core elements (1986. overview)
- Corporate tax:
  - Reduction from 35 percent to 21 percent.
  - 21 percent characterized as slightly below OECD average.
  - Measures to limit profit shifting and base erosion: tax on low-taxed excess earnings of CFCs; limitation of base erosion via interest and other deductible payments.
- Personal tax changes:
  - Simplify personal tax system; temporarily lower marginal rates across all incomes; reform AMT; almost double standard deduction; bolster child credit.
- Fiscal outlook and infrastructure:
  - FY 2019 Budget projects deficit of 4.7 percent of GDP in FY2019 (up from estimated 4.2 percent in FY2018).
  - Administration’s infrastructure plan: US$200 billion federal spending over FY2019–2028 to generate US$1.5 trillion in overall public and private investment; US$100 billion Incentives Program to match up to 20 percent for new dedicated revenue streams.
- Monetary policy and financial regulation summaries reflect FOMC data-dependence, balance sheet normalization, and passage of Economic Growth, Regulatory Relief, and Consumer Protection Act.
- Competition policy:
  - Administration disagrees with staff conclusions on market power and with staff’s proposal for a tax to address markups; argues evidence is inconclusive.

*Source: IMF staff report (cr18207), United States, IMF staff analysis and projections as provided in the source PDF.*

### 1. Determinants of U.S. Wage Inflation ____________________________________________________________ 6

### 1. Determinants of U.S. Wage Inflation

### Key findings from the wage Phillips-curve analysis
- U.S. wage growth has been subdued since the end of the great recession, despite robust job growth and a steady fall in unemployment.
- Estimates of a wage Phillips curve suggest that this weak wage growth is mostly a product of low labor productivity growth.
- The model fits the data well and its parameters are robust to the use of different measures of labor market slack and show no sign of structural instability over time.
- Decomposition of compensation growth across the current recovery shows:
  - Diminishing downward pressure on compensation growth as labor market slack has diminished.
  - This easing of slack-related drag has been offset by a similarly-sized and contemporaneous decline in labor productivity growth.
- Additional factors that have kept the growth rate of real compensation below that of labor productivity include:
  - Technological progress—linked to the automation of routine tasks.
  - Trade globalization.
  - Falling unionization rates.

### Micro-econometric evidence (CPS-based augmented Mincer model)
- The micro-level regressions control for individual characteristics including education, gender, and profession.
- A higher local rate of unemployment puts downward pressure on wages, although this relationship appears to have weakened post great recession.
- Structural changes associated with technology, globalization, and market concentration materially affect wages:
  - College-educated workers in routinizable jobs face greater downward pressure on their wages.
  - Less-educated workers have experienced the most downward wage pressures when they are in jobs that are easiest to offshore.
  - Working in industries that are more concentrated weighs on wages for both college and non-college educated workers.
- The stated magnitudes in the source reflect movements from the median routinizable and offshorable occupation to the 66th percentile, and effects of a 10-percentage point movement of workers to large firms within the same industry.

### Interpretation and implications
- The subdued aggregate wage dynamics reflect a mix of cyclical and structural forces:
  - Cyclical: diminishing slack should mechanically raise wage pressure going forward.
  - Structural: persistent low labor productivity growth and structural factors (automation, globalization, concentration, unionization decline) have offset cyclical tightening.
- As slack continues to diminish, a modest rise in wages and unit labor costs is anticipated in the near term, but the pace will depend critically on the evolution of productivity and the structural drivers highlighted above.

### Research references cited in the analysis
- Y. Abdih and S. Danninger, 2018 “Understanding U.S. Wage Growth”, IMF Working Paper, WP/18/138.
- Y. Abdih and S. Danninger, 2017 “What Explains the Decline in the U.S. Labor Share of Income? An Analysis of State and Industry Level Data,” IMF Working Paper WP/17/167.

*Source: Box 1, "Determinants of U.S. Wage Inflation", IMF staff analysis as provided in the content unit.*

### 1.5 percent––comparable to the impulse from the

### cr18207 - 1.5 percent––comparable to the impulse from the

### Nonlinear versus linear Phillips Curve: model results
- Context: A 1.5 percent impulse (comparable to the impulse from the 2018–19 fiscal expansion) is analyzed in two models: FRB/US (central bank follows an optimal control policy) and G20 MOD (central bank reacts according to a forward-looking Taylor rule).
- Qualitative result: Results for the two models are qualitatively similar.
- Key dynamics:
  - Policy rates rise faster and higher when the slack–inflation trade-off is characterized by a nonlinear Phillips Curve.
  - Tighter U.S. and global financial conditions result relative to the linear Phillips Curve case.
  - In the nonlinear case, despite higher policy rates, the inflation path is higher than in the linear case.
- Illustrative outcomes shown (charts in source): differences in core inflation and Fed funds rate (percent, difference from baseline) and phased impacts on inflation (percentage points) and output gap (percent), with a region where nonlinearity is pronounced.

### Term structure of interest rates and forecasting structural variables (Box 3)
- Observation: Term premia have been very low and sometimes negative, attributed to low inflation, above trend growth, and potentially the Federal Reserve’s quantitative easing program.
- Model: A macro-financial term structure model exploiting cross-sectional and temporal information in the yield curve and cyclical economic variables.
- Finding: Expectations about structural factors (e.g., long run inflation expectations or the equilibrium real interest rate) are revised only slowly after large shocks; most variation in bond yields is explained by changes in term premia and, to a lesser extent, economic conditions rather than shifting long-run expectations.
- Market-embedded forecasts derived from the model:
  - Unemployment rate is projected to drop further to around 3½ percent before trending back to its long-term natural level.
  - The policy rate is expected to modestly overshoot its long-run expected value.
  - Long-term rates are expected to rise to around 3.7 percent.
- Charts referenced (source): Unemployment Rate Forecasts (percent) and Interest Rate Forecasts (percent) for risk-free, 2yr, and 10yr rates for 2018–2027.

### Household saving, business investment, and U.S. current account (Box 4)
- Personal saving:
  - Historical pattern: Secular decline in household saving rate since mid-1970s; trend reversed after the financial crisis and more recently resumed.
  - Econometric test: Time-series vector error correction model finds little evidence of a post-financial crisis break in elasticities between household consumption, disposable income and household net worth; coefficients stable over 50 years.
  - Interpretation: The 2008–13 rise in the personal saving rate mainly resulted from disposable income path, higher unemployment, and fall in wealth during that period.
  - Forecast: Conditioning on staff’s medium-term forecasts, the household saving rate is predicted to continue falling and eventually revert to the pre-2007 secular downtrend.
- Business investment:
  - Puzzle: Investment growth has been lackluster despite record corporate profits, supportive financial conditions, robust sentiment, rising equity valuations, and improving labor markets.
  - Econometric finding: Weak expected demand growth explains most sluggish capital formation since the financial crisis; decline in global oil prices weighed on aggregate investment from 2014 onwards.
  - Outlook: With expectations of solid future demand growth and recovery in oil and gas sectors, business investment should continue to strengthen.
- Implications for the current account:
  - Upward revisions to growth projections -> rise in investment-GDP.
  - Solid disposable income growth and household wealth gains -> further decline in saving rate.
  - Public sector saving-investment balance expected to worsen.
  - Combined effect: Expected increase of around 1 percent of GDP in the U.S. current account deficit (bringing it to the highest level seen since the global financial crisis).
- Empirical charts referenced: Nonresidential Business Investment log index (2010–2017) and Personal savings rate, percent of disposable income (1990–2017) with model-fitted and model forecast.

### Monetary policy guidance and risks
- Fed response to fiscal stimulus:
  - The Federal Reserve will need to raise policy rates at a faster pace to achieve its dual mandate.
  - The Federal Reserve should be ready to accept some modest, temporary overshooting of its medium-term inflation goal (as indicated by the range of FOMC participants’ forecasts).
  - Even with modest overshooting, policy rates will likely need to rise for a time above the long-run neutral rate.
- FOMC and staff projections:
  - FOMC participants’ median forecast suggests core inflation and federal funds rate will rise at a moderately slower pace than staff’s forecasts, consistent with their expectation of somewhat slower growth in 2018-19.
- Balance sheet normalization:
  - Barring a significant negative shock (e.g., a return to the effective lower bound), normalization of the balance sheet should proceed as outlined in the Fed’s policy normalization principles.
- Communication recommendations:
  - Continued adherence to data dependence and clear communication is vital.
  - Scheduling a press conference after every FOMC meeting and publishing a quarterly monetary policy report (detailing a central economic scenario and endorsed risk description) could help.
- Spillovers:
  - Near-term net effect of higher U.S. growth and expected higher U.S. interest rates is expected to be beneficial for most economies.
  - Largest positive spillovers likely to accrue to Canada and Mexico.
  - Potential stress remains for leveraged firms and households (domestic and abroad) and for indebted sovereigns; some strains are already evident in a handful of countries.
- Authorities’ assessment:
  - Risks to economic outlook and inflation prospects judged roughly balanced.
  - Further, gradual increases in federal funds rate consistent with solid expansion, strong labor market, and inflation near the FOMC’s 2 percent medium-term objective.
  - It looked likely inflation would modestly overshoot 2 percent for a time but some recent acceleration may be transitory (e.g., health care and financial services).
  - Little empirical evidence that the Phillips Curve is possibly steeper at lower unemployment, though intensified upward wage and price pressures driven by supply constraints are an important risk.
  - The federal funds rate path will continue to depend on incoming data.

### Key macroeconomic projections and indicators (select figures from source)
- Real GDP Growth (annual average): IMF 2.6 (2018), 2.3 (2019), 1.7 (2020), 4.1 (2021) [table formatting in source; presented here as cited values].
- Unemployment Rate (eop): IMF 2.92 (2017) ... [source contains a multi-row projection table with multiple series (IMF, CBO, Consensus, FOMC) across years; detailed numeric series are in the original].
- PCE Inflation (Q4/Q4) and Core PCE Inflation (Q4/Q4): IMF 1.5 and 1.5 (rows in source; full table available in original).
- Federal Funds Rate (eop): IMF 1.5 (value shown in source chart area).
- Budget balance (federal government, percent of GDP): IMF -2.1 (value displayed).
- Debt held by the public (federal government, percent of GDP): IMF 76.5 (value displayed).
- Output Gap (percent of potential, annual average): IMF -4.1, -4.6, -4.5, -4.7 ... [multi-year values shown in source].

### Restoring fiscal sustainability and rebuilding fiscal space
- Target: Raise the primary fiscal surplus of the general government to around 1¼ percent of GDP (1½ percent of GDP for the federal government) to put the debt-to-GDP ratio on a downward path.
- Strategic guidance: U.S. has some fiscal space but should not use it at this stage in the cycle; policies should be designed to:
  - Reform social security by raising the income ceiling for contributions, indexing benefits to chained inflation, and accelerating the planned increase in the retirement age.
  - Contain healthcare cost inflation through technological solutions to increase efficiency, greater cost sharing with beneficiaries, and changing mechanisms for remunerating healthcare providers.
  - Increase the federal revenue-GDP ratio by implementing a broad-based carbon tax, a federal consumption tax, and a higher federal gas tax.
- Intended outcomes: Allow public debt-to-GDP ratio to fall and create fiscal space to support low- and middle-income families, promote investments in human and physical capital, and increase medium-term growth.
- Near-term implication: Gradual tightening in the fiscal position likely restrains growth below staff’s baseline forecast; successful supply-side policies could raise potential and actual growth over the medium-term.
- Warning: Without policy change reversing planned fiscal deterioration, resource costs of the tax reform, approved spending increases, and aging pressures will preclude fiscal space for policies needed to sustainably raise potential growth.
- Infrastructure financing:
  - Broad agreement that increasing federal spending on infrastructure is urgently needed; fiscal space must be created.
  - Recently approved budget bill for 2018-19 provides little incremental funding for infrastructure despite the administration’s proposal of US$200 billion in appropriations requested.

### Macro-structural policies to boost potential growth (Box 5)
- Tackling poverty:
  - Expand eligibility for and increase generosity of the Earned Income Tax Credit (EITC); combine with an increase in the federal minimum wage to offset potential pre-tax wage declines.
  - Upgrade federal and state social assistance: simplify/unify programs, increase direct transfer generosity, avoid “cliffs,” better target payments to outcomes.
- Improving education:
  - Prioritize early childhood education and institute universal pre-K.
  - Support STEM programs; redesign public school funding to reduce disparities and give more resources to high-poverty districts.
  - Expand apprenticeship and vocational programs; focus on college readiness and retention; explore alternative tertiary financing (income contingent repayment loans and expanded needs-based grants).
- Providing family friendly benefits and expanding the labor force:
  - Institute paid family leave.
  - Provide means-tested assistance for child and dependent care.
  - Undertake skills-based immigration reform.
- Better healthcare:
  - Protect gains in health care coverage achieved since the financial crisis.
  - Use pilot programs and new technologies to increase efficiency and pricing transparency to contain healthcare inflation.
  - Assess antitrust or other solutions where market concentration of health providers or insurers has increased and non-group premiums are rising rapidly.

*International Monetary Fund — United States staff report content as provided in the source PDF.*

### 17.      However, the approved tax policy changes have a high budgetary cost at a time

### cr18207 - 17.      However, the approved tax policy changes have a high budgetary cost at a time

### Tax policy overview and fiscal concern
- Approved tax policy changes have a high budgetary cost while the federal budget is in urgent need of revenues.
- The temporary nature of many provisions creates significant tax policy uncertainty and instability.
- Authorities should seek to prevent the tax policy changes from adding to the fiscal deficit by increasing the revenue-to-GDP ratio (largely through a greater reliance on indirect taxes).

### A. Business Tax — findings and recommendations
- Positive measures:
  - Reduction in the statutory business tax rate to around the OECD average.
  - Expensing of certain types of capital spending helps incentivize investment and lessens base erosion and profit shifting incentives.
- Concerns:
  - Deductibility of interest with a cap as a share of earnings remains, conveying an overly generous benefit for debt-financed investment that can be immediately expensed and continuing to incentivize debt financing.
  - The cap introduces a procyclical distortion (the cap becomes more binding when earnings weaken), which could exacerbate strains and bankruptcies in a downside scenario.
  - The temporary nature of the expensing provision distorts timing of investment decisions (favoring investing before provisions expire).
  - The one-time very low tax rate on the stock of unrepatriated profits conveys significant benefits to taxpayers who chose not to repatriate profits.
  - Preliminary evidence indicates U.S. multinationals have significantly increased plans for share buybacks and dividend payouts following reform.
- Policy preference:
  - Move further toward a cashflow tax: permanently allow expensing of all capital outlays and fully eliminate the deduction for interest spending on newly-contracted debt.

### B. Personal Income Tax — findings and policy options
- Positive aspects:
  - Elimination of most itemized deductions.
  - A higher standard deduction and elimination of personal exemptions.
  - Limits on the deduction for state and local taxes and a lower cap on the mortgage interest deduction.
  - Most U.S. households will see a reduction in their income tax in the next few years.
- Distributional concerns:
  - Net effect (including reductions in the alternative minimum tax and a reduction in the marginal rate for higher income households) provides greater benefits to those in the upper deciles of the income distribution.
  - Changes are likely to exacerbate income polarization and do little to address the working poor; relative burden on low- and middle-income households rises as various provisions expire.
- Policy recommendations:
  - Recalibrate rate structure to concentrate tax relief to those earning close to or below the median income, with tax relief phasing out for those earning above 150 percent of the median income (the top third of the income distribution).
  - Increase coverage and generosity of the Earned Income Tax Credit.
  - Eliminate loopholes and special regimes for high income earners, including the carried interest provision.
  - Expected effects: support low- and middle-income households, strengthen private sector demand, incentivize work, and raise living standards.

### C. Pass-Throughs — findings
- Allowing a 20 percent deduction for pass-through income creates a mechanism for high income individuals to reduce tax by recharacterizing personal income as pass-through income.
- With around one half of the U.S. corporate tax base constituted as pass-throughs, this undermines objectives of increasing equity and simplifying the system.
- TCJA contains guardrails limiting use of the pass-through deduction, but effectiveness in preventing erosion of the personal income tax base or redesign of operations to qualify for the deduction is unclear.

### D. International Provisions — findings and recommendations
- U.S. moved from global taxation with deferral to a modified territorial system embedding anti-avoidance measures and a minimum tax on offshore profits.
- Staff previously recommended moving to a territorial system with a minimum tax on offshore profits.
- Scope to strengthen design:
  - GILTI: should be imposed on a country-by-country basis so it falls on all profits earned in low tax jurisdictions instead of on average global profits in excess of a deemed 10 percent return on tangible assets. Current design linked to worldwide profits and tangible capital creates complex, distortionary effects on global investment decisions.
  - FDII: the lower tax rate for exporters should be eliminated to avoid economic distortion from more favorable tax treatment for exports than domestic sales.
  - BEAT: likely to curtail base erosion and profit shifting but may be punitive for legitimate commercial activities, create preference for domestic over foreign production, and incentivize rearrangements to avoid BEAT. Recommendation: apply BEAT only to transactions designed to transfer profits to related parties in low tax jurisdictions.

### E. International tax policy spillovers — findings
- TCJA creates complex positive and negative spillovers for other countries.
- Move to territoriality heightens likelihood of profits and investments shifting from the U.S. into lower tax jurisdictions; however, reduced U.S. statutory rate and preferential treatment for some exporters are countervailing forces that could encourage other jurisdictions to lower rates.
- Potential effects:
  - GILTI and FDII could encourage location of tangible investments abroad, especially where effective foreign tax rate is low and projects generate sizable related-party commercial payments (which may be subject to BEAT if paid from a U.S. entity).
  - GILTI is likely to discourage offshore jurisdictions from competing for U.S. investments by reducing tax rates below 13.125 percent and may provide a floor on competition in the statutory rate.
  - Other jurisdictions may respond with faster depreciation rates (or expensing), versions of BEAT, or other measures aimed at anti-profit shifting.
- Final impact will vary considerably by country; some have expressed WTO- and treaty-related concerns.

### Authorities’ views on tax reform and growth
- Administration views TCJA as historic, spurring growth and providing middle-class tax cuts.
- Treasury modeled revenue impact of higher growth, using Administration projections of approximately a 2.9 percent real GDP growth rate over 10 years contained in the Administration’s Fiscal Year 2018 Budget.
- Administration’s policies, relative to the baseline, would add around 0.7 percent to the annual real GDP growth rate over 10 years, with approximately half of this increase coming from changes in corporate taxation.
- Additional growth effects expected from changes to pass-through taxation, individual income tax, regulatory reform, infrastructure development and welfare reform.
- Expensing regarded as a tool to “front-load” growth effects; higher growth estimated to generate enough revenue to cover the static cost of the tax bill.
- Reported short-term outcomes: over six million American workers were given special bonuses, wage increases or other benefits in the few weeks and months after signing the Act into law.
- Administration believes international provisions will encourage investment and jobs to return to the U.S. and prevent a “race to the bottom” by no longer encouraging offshore entities in low tax jurisdictions.

### Trade policy — recent actions, risks, and recommendations
- Recent trade actions and reviews:
  - Investigations under Section 232 of the 1962 Trade Expansion Act (aluminum and steel) and a Section 301 investigation under the 1974 Trade Act into China’s actions related to technology transfer, intellectual property, and innovation.
  - Review of “Buy American” provisions in government procurement.
  - Study on causes of the U.S. trade deficit for partners with significant bilateral deficits (completed but not publicly available).
  - Renegotiations of NAFTA and the free trade agreement with South Korea.
- Recent tariffs imposed:
  - Tariff of 25 percent on steel and 10 percent on aluminum (with exemptions for Australia and Argentina (both metals) and Brazil and South Korea (steel only)) under section 232.
  - Safeguard tariffs under Section 201 on washing machines and solar panels.
  - Proposed tariffs on around US$150 billion of imports from China under Section 301; China proposed tariffs on US$50 billion of U.S. products in response.
  - U.S. temporarily put on hold proposed tariffs on China pending further discussions; initiated Section 232 investigation of automobiles and automotive parts.
- Risks from these measures:
  - Catalyzing retaliatory trade responses that create uncertainties and discourage investment.
  - Expanding use of national security rationale to justify import restrictions, undermining rules-based global trading system.
  - Interrupting global and regional supply chains, damaging countries and U.S. multinationals reliant on them.
  - Impacting vulnerable emerging and developing economies via increased financial market or commodity price volatility.
- Recommended approach:
  - Work constructively with trading partners to reduce trade barriers and resolve disputes without resorting to tariff and non-tariff barriers.
  - Avoid using specific bilateral trade balance levels as anchors or targets.
  - Pursue gains from strengthening rules-based multilateral trading system and from ambitious bilateral and plurilateral agreements.
  - Mitigate consequences for trade-affected U.S. workers through training, temporary income support, job search assistance, and broader deployment of the trade adjustment assistance program.

### Box 6 — Impact of a Successful Renegotiation of NAFTA (scenario and key quantitative results)
- Scenario simulated assumptions:
  - Elimination of all tariffs between the three signatories.
  - A one-percent increase in good trade efficiency.
  - A reduction by 25 percent of service trade inefficiencies.
  - A reduction in compliance costs from rules of origin provisions.
- Aggregate and distributional results:
  - All three countries would benefit: Real GDP would increase in all three countries.
  - Trade among the three countries would increase by 4 percent overall.
  - Canada’s bilateral trade surplus with the U.S. would fall by 25 percent; Mexico’s surpluses with Canada and the U.S. would remain largely unchanged.
  - Sectoral composition changes: apparel and textile sectors would grow in Mexico; apparel and motor vehicles would be net gainers in Canada; dairy products and textiles would expand in the U.S.; motor vehicles and auto parts output would increase in all three countries.
  - Effects on services industries would be relatively small.
- Rules of origin sensitivity:
  - Tighter rules of origin in the automotive sector would offset some positive effects: U.S. exports of auto parts to Canada and Mexico would decline, as would U.S. imports of vehicles from both countries; a greater share of demand for parts and vehicles would be met from imports outside NAFTA; Mexico’s auto industry would be most negatively affected.
- Quantitative indicators presented:
  - Percentage Change in Real GDP due to Successful NAFTA Renegotiation: 0.37, 0.27, 0.05 (Canada, Mexico, United States).
  - Trade among three countries increases by 4 percent overall.
  - Canada’s bilateral trade surplus with the U.S. would fall by 25 percent.

*Source: cr18207 - 17.      However, the approved tax policy changes have a high budgetary cost at a time*

### 32.      Important gains have been made in strengthening the financial oversight structure

### 32.      Important gains have been made in strengthening the financial oversight structure

### Major reforms and adjustments to oversight
- Legislation raises the total asset threshold to US$250 billion for bank holding companies (BHC) to be classified as systemic.
  - Provides the Federal Reserve the ability to deem BHCs with assets between US$100–250 billion as systemic and subject to enhanced prudential standards.
  - Recommendation: Consider continuing to apply stress-tests at a regular frequency for banks with assets between US$100-250 billion.
  - Implementation caveat: Changes should not weaken supervisors’ ability to take early remediation and risk mitigation actions for BHCs with assets below US$250 billion.
- Modest tailoring of the Dodd-Frank Act framework:
  - Exclude custodial assets from the calculation of the Supplementary Leverage Ratio.
  - Include highly liquid municipal bonds in the definition of High Quality Liquid Assets (subject to limits and haircuts).
  - Exempt BHCs with total assets under US$10 billion from the Volcker rule.
  - Care: Ensure changes do not deviate materially from international standards.
- Proposal to modify the enhanced supplementary leverage ratio (eSLR) for GSIBs:
  - Set the ratio at 3 percent plus a buffer of 50 percent of the entity’s risk-based capital surcharge.
  - Effect: Make the risk-based capital requirement, rather than the leverage ratio, binding for most GSIBs.
  - Concern: Proposal remains somewhat more stringent than international minimum standards but would diminish buffers that have helped increase U.S. banking system resilience.
- Treasury proposals on resolution and designation:
  - Introduce a new special, streamlined bankruptcy procedure to strengthen courts’ ability to deal with complex financial failures; complement—but not replace—the existing Orderly Liquidation Authority.
  - More tightly circumscribe FDIC authority (including use of public money) when resolving a financial institution.
  - Increase transparency and analytical rigor of the FSOC’s designation process: comprehensive cost-benefit analysis, clear guidance for designated institutions, activity-based framework, and designation as a last resort.
  - Implementation caveat: Changes should not limit resolution flexibility, hinder rapid action, or complicate cross-border resolution; clarify and implement changes at an early stage.
- Volcker Rule simplification:
  - Federal Reserve advanced proposal to lessen compliance requirements, simplify the regime, make it easier to enforce, and move toward a more risk-based standard.
  - Importance of clarifying enforcement approach and extent of banks’ latitude for self-policing; carefully monitor implementation effects.

### Interaction effects and systemic risk concerns
- Individually, tailoring steps are likely to have only a modest impact on financial stability risks.
- Potentially important interactions between regulatory changes that largely move procyclically, combined with procyclical fiscal policy, could amplify medium-term financial stability risks.
- Medium-term financial vulnerabilities have been steadily building and are elevated; more analysis is needed to assess combined effects of all changes.

### Policy recommendations for future oversight
- Preserve the current risk-based approach to regulation, supervision, and resolution.
  - Maintain risk-based capital and liquidity standards combined with strong supervision as central tools.
  - Maintain and strengthen the Comprehensive Capital Analysis and Review exercise, including assessment of liquidity and contagion risks.
- Recognize that greater tailoring increases reliance on high-quality and independent supervision.
- FSOC should continue to respond to emerging threats and consider strengthening and more fully resourcing the Office of Financial Research.
- U.S. should remain engaged in developing the international financial regulatory architecture and be fully committed to agreed international standards.

### Oversight of nonbanks — gaps and priorities
- Need to strengthen oversight of nonbanks:
  - Absence of harmonized national standards or consolidated supervision for insurance companies creates potential weaknesses.
  - Recent proposals limiting federal engagement in international supervisory fora could complicate insurance standard setting and global capital standard development.
  - Residual vulnerabilities remain in money markets, repo markets, and for money market funds despite progress in money market reform.
  - Need to introduce a comprehensive liquidity risk management framework for asset managers (including liquidity risk stress tests).
  - Little progress on reforming the housing finance system or the government sponsored enterprises.
  - Data impediments: Obstacles to data sharing among regulatory agencies and data blind spots—particularly for nonbank activities—preclude a full understanding of system risks, interlinkages, and interconnections.

### Authorities’ views
- Administration objectives:
  - Make financial regulation efficient and appropriately tailored to institution size and systemic risk profile, while preserving Dodd-Frank Act improvements.
  - Change eSLR to make risk-based capital standards the binding constraint (leverage ratio as backstop).
  - Maintain orderly liquidation framework (including orderly liquidation fund) while strengthening courts’ role.
  - Use Economic Growth, Regulatory Relief, and Consumer Protection Act to tailor supervision of small and medium-sized BHCs.
  - FSOC to use activities-based approach relying on primary regulators; reserve designation for where this is insufficient; make designation process more transparent with a clear path for de-designation.
  - Implement a stress capital buffer instead of fixed capital surcharges to formalize capital constraints for large BHCs.
- Authorities’ assessment:
  - Do not see the banking system as an imminent source of financial stability risk.
  - Risks from institutions outside the regulated perimeter are assessed to be moderate (insurance industry, asset management, crypto currencies and cyber risk).

### Staff appraisal — concise conclusions and recommendations
- Economic outlook:
  - Near-term: strong growth and job creation; favorable external environment.
  - Next year: U.S. economy expected to mark the longest expansion in its recorded history.
  - Medium-term: policies boosting near-term prospects are creating vulnerabilities.
- Fiscal policy:
  - U.S. is pursuing a procyclical fiscal policy that will elevate risks to the U.S. and global economy.
  - Recommendation: Planned expansion in the fiscal deficit should be reversed.
  - Risks: Adds to unsustainable public debt, increases global imbalances, raises recession risk, and reduces budget resources for supply-side reforms.
- Monetary policy:
  - Sizable fiscal stimulus likely means the Federal Reserve will need to raise policy rates at a faster pace; policy rates will likely need to rise, for a time, above the long-run neutral rate.
  - Importance of Fed’s data dependence and clear communication.
  - Risk: An inflation surprise driven by binding capacity constraints could create volatility and disruptions in U.S. and international financial markets with negative spillovers.
- Tax policy:
  - Recommendation: Increase revenue-to-GDP ratio through greater reliance on indirect taxes.
  - Personal income tax relief should be targeted at those earning close to or below the median income, including through a more generous and expansive Earned Income Tax Credit.
  - Business tax should transition to a cashflow tax, make permanent immediate expensing of capital spending, and eliminate interest deductibility for new debt.
  - Redesign international provisions to impose a minimum tax targeted more narrowly to low-tax jurisdictions and avoid discriminatory treatment between imports, exports, and production for domestic use.
- Trade policy:
  - Recommendation: U.S. and trading partners should work constructively to reduce trade barriers and resolve disputes without tariff and non-tariff barriers.
  - Warning: Unilateral trade measures are likely to move the globe away from an open, free, fair, reciprocal and rules-based global trading system, damaging the U.S. economy and causing negative spillovers via retaliatory responses.
- Financial stability:
  - Important gains made since the global financial crisis.
  - Near-term risks broadly similar to previous Article IV; medium-term risks are elevated.
  - Specific risks include high equity market valuations, rising leverage and weakening underwriting standards for corporate credit, growth of passively managed investment products, and cyber risk uncertainties.
  - Recent proposals to simplify regulations generally improve but increase reliance on high-quality independent supervision; continued need to strengthen oversight of nonbanks.
- Outward spillovers:
  - Net effect of U.S. policy choices (budget and tax) will provide a near-term boost to trading partner output but increase future risks, uncertainties, and global imbalances.
  - If policy mix prompts tightening of global financial conditions, countries with high U.S. dollar debt and/or significant rollover needs are likely to come under pressure.
  - Risk of marked reversal of capital flows away from emerging markets, which could be disruptive; early symptoms are already observed in some countries.

*IMF staff summary based on the chapter "32. Important gains have been made in strengthening the financial oversight structure."*

### 48.      It is recommended that the next Article IV consultation take place on the standard

### It is recommended that the next Article IV consultation take place on the standard 12-month cycle.

### Macro outlook and key projections
- Real GDP: 2016: 1.5; 2017: 2.3; 2018: 2.9; 2019: 2.7; 2020: 1.9; 2021: 1.7; 2022: 1.5; 2023: 1.4 (percentage change from previous period).
- Total domestic demand: 2016: 1.7; 2017: 2.4; 2018: 3.3; 2019: 3.2; 2020: 2.3; 2021: 1.7; 2022: 1.6; 2023: 1.3.
- Unemployment rate: 2016: 4.9; 2017: 4.4; 2018: 3.8; 2019: 3.5; 2020: 3.4; 2021: 3.6; 2022: 3.6; 2023: 3.8.
- Labor force participation rate: 2016: 62.8; 2017: 62.8; 2018: 62.8; 2019: 62.6; 2020: 62.4; 2021: 62.2; 2022: 62.0; 2023: 61.8.
- CPI inflation (q4/q4): 2016: 1.8; 2017: 2.1; 2018: 3.2; 2019: 2.7; 2020: 2.3; 2021: 2.2; 2022: 2.2; 2023: 2.3.
- Core PCE Inflation (q4/q4): 2016: 1.9; 2017: 1.5; 2018: 2.0; 2019: 2.3; 2020: 2.2; 2021: 2.0; 2022: 2.0; 2023: 2.0.
- Fed funds rate (period average): 2016: 0.4; 2017: 1.0; 2018: 1.9; 2019: 3.0; 2020: 3.6; 2021: 3.2; 2022: 2.9; 2023: 2.9.

### Fiscal outlook and public debt
- Federal balance (% of GDP), staff-adjusted: 2016: -3.2; 2017: -3.5; 2018: -4.1; 2019: -4.6; 2020: -4.5; 2021: -4.7; 2022: -5.0; 2023: -4.8.
- Federal debt held by the public (% of GDP): 2016: 76.7; 2017: 76.5; 2018: 76.9; 2019: 77.2; 2020: 78.5; 2021: 80.5; 2022: 82.5; 2023: 84.6.
- General government budget balance (% of GDP): 2016: -4.2; 2017: -4.5; 2018: -5.3; 2019: -5.5; 2020: -5.3; 2021: -5.4; 2022: -5.4; 2023: -4.9.
- General government gross debt (% of GDP): 2016: 107.2; 2017: 105.6; 2018: 106.0; 2019: 106.5; 2020: 108.1; 2021: 109.9; 2022: 111.6; 2023: 113.1.
- From Table 3 (projections): Federal government primary balance (percent of GDP) 2017: -2.1; 2018: -2.5; 2019: -2.8; 2020: -2.4; 2021: -2.4; 2022: -2.6; 2023: -2.3; 2024: -2.0; 2025: -2.2; 2026: -1.9; 2027: -1.7.
- Federal debt held by the public (percent of GDP) projections: 2017: 76.5; 2018: 76.9; 2019: 77.2; 2020: 78.5; 2021: 80.5; 2022: 82.5; 2023: 84.6; 2024: 85.9; 2025: 87.5; 2026: 88.8; 2027: 89.9.

### External sector and balance of payments
- Current account balance (% of GDP): 2016: -2.4; 2017: -2.4; 2018: -3.0; 2019: -3.2; 2020: -3.6; 2021: -3.4; 2022: -3.2; 2023: -3.0.
- Merchandise trade balance (% of GDP): 2016: -4.0; 2017: -4.2; 2018: -4.6; 2019: -4.7; 2020: -5.2; 2021: -5.1; 2022: -5.1; 2023: -5.0.
- Net International Investment Position (NIIP) (% of GDP): 2016: -44.7; 2017: -40.5; 2018: -41.4; 2019: -42.5; 2020: -44.4; 2021: -46.2; 2022: -47.8; 2023: -49.2.
- NIIP path assessment: NIIP increased from -44.7 percent of GDP in 2016 to -40.5 percent of GDP in 2017, mostly due to valuation changes linked to the depreciation of the U.S. dollar by end-2017; under staff’s baseline scenario, the NIIP is projected to decline by about 8 percent of GDP over the next five years, due to a path of increasing current account deficits.
- Current account balance (US$ billions): 2016: -452; 2017: -466; 2018: -618; 2019: -698; 2020: -812; 2021: -799; 2022: -780; 2023: -756.
- EBA model estimate: cyclically-adjusted CA of -2.2 percent of GDP (assessment context provided; full CA norm text truncated in source).

### Financial stability and vulnerabilities
- Financial stability risk noted: potential for an unexpected decline in foreign demand for U.S. fixed income securities, heightened by deterioration in the U.S. medium-term fiscal outlook, though risk remains moderate given the dominant status of the U.S. dollar as a reserve currency.
- Composition of U.S. foreign assets: around 65 percent are in the form of FDI and portfolio equity claims, which tend to decline when global growth and stock markets are weak and when the U.S. dollar appreciates.
- Core FSIs for deposit takers (selected historical metrics): Regulatory capital to risk-weighted assets (2011–2017 series ending 14.4, 14.4); Non-performing loans to total gross loans (2011–2017 series ending 1.2); Return on equity (2011–2017 series ending 3.3).

### Risk Assessment Matrix — salient risks, likelihoods and impacts
- Retreat from cross-border integration: Overall Level of Concern: Medium; Medium-term Likelihood of Realization: Medium; Expected Impact: wide-ranging negative effects on trade, capital flows, growth, confidence, and global cooperation on financial regulation.
- Policy uncertainty: Overall Level of Concern: Medium; Medium-term Likelihood of Realization: Medium; Expected Impact: Two-sided risks to U.S. growth; could fuel global imbalances as well as FX and capital flow volatility.
- Significant U.S. slowdown: Overall Level of Concern: Medium; Medium-term Likelihood of Realization: Medium; Expected Impact: High — output gap could close more abruptly, policy-induced recession affecting U.S. and global economy.
- Intensification of fragmentation/security dislocation: Overall Level of Concern: High; Medium-term Likelihood of Realization: High; Expected Impact: Low — socio-economic disruptions in affected regions with migration challenges and negative spillovers.
- Tighter global financial conditions: Overall Level of Concern: High; Medium-term Likelihood of Realization: High; Expected Impact: Medium — abrupt change in global risk appetite could lead to sudden increases in interest rates, higher debt service and refinancing risks.
  - Quantified effect: "A 10 percent dollar appreciation is estimated to reduce GDP by around 0.5 percentage points in the first year and 0.5-0.8 percentage points in the second year. The current account deficit would also widen by around 1 percent of GDP."
- Structurally weak growth in key advanced economies: Overall Level of Concern: High; Medium-term Likelihood of Realization: High; Expected Impact: Medium.
  - Quantified effect: "A 1-percentage point decline in growth in advanced and emerging economies could subtract about 0.1 percentage points of U.S. GDP after two years."
- Significant China slowdown and its spillovers: Overall Level of Concern: Low / Medium; Medium-term Likelihood of Realization: Medium; Expected Impact: Medium.
  - Reiterated quantified effect: "A 1-percentage point decline in growth in advanced and emerging economies could subtract about 0.1 percentage points of U.S. GDP after two years."
- Low energy prices: Overall Level of Concern: Low; Medium-term Likelihood of Realization: Low / Medium; Expected Impact: Limited on aggregate U.S. growth, but increased solvency risk in the oil sector.
- Cyber-attacks: Overall Level of Concern: Medium; Medium-term Likelihood of Realization: Medium; Expected Impact: High — systemic financial instability or wide socio-economic disruption possible.

### Policy recommendations and staff assessment
- External position assessment: "The U.S. external position was moderately weaker than implied by medium-term fundamentals and desirable policies in 2017."
- Fiscal consolidation recommended: "Fiscal consolidation, to achieve a general government primary surplus of about 1¼ percent of GDP (a federal government primary surplus of about 1½ percent of GDP) will be necessary to put the debt-GDP ratio on a downward path and address the CA gap."
- Structural policies recommended to strengthen export competitiveness and reduce the CA gap (within a tighter budgetary envelope):
  - Upgrading investment in transportation infrastructure.
  - Enhancing schooling and training of workers.
  - Supporting the working poor.
  - Policies to increase growth in the labor force (including skill-based immigration reform).
- Trade policy advice: "Trade and investment disagreements should be resolved without resorting to the imposition of tariff and non-tariff barriers."
- Assessment of policy uncertainty: "Actual and prospective changes in trade, taxation, and immigration policies add substantial uncertainty to the assessment."

*Source: IMF staff report (cr18207), United States, IMF staff estimates and projections, and associated tables and Risk Assessment Matrix included in the source document.*

### 0.7 percent of GDP. The cyclically-adjusted CA gap is -1.5 perc

### cr18207 - 0.7 percent of GDP. The cyclically-adjusted CA gap is -1.5 perc

### Current account: levels, cyclically-adjusted gap, and assessment
- Actual CA: -2.4
- Cycl. Adj. CA: -2.2
- EBA CA Norm: -0.7
- EBA CA Gap: -1.5
- Staff Adj.: 0.0
- Staff CA Gap: -1.5
- Staff assessment: The 2017 cyclically-adjusted CA is assessed to be 1.0 to 2.0 percent of GDP lower than the level implied by medium-term fundamentals and desirable policies.
- Additional decompositions for 2017:
  - Policy gaps: -0.5 percent of GDP
  - Unidentified residual: -1.0 percent of GDP
- External Sustainability Approach estimate: CA gap of -2.2 percent of GDP

### Real exchange rate (REER): background and assessment
- Background:
  - REER appreciated by about 18 percent between 2012 and 2016
  - REER depreciated by about 0.6 percent in 2017
  - As of May 2018, REER has depreciated by about 3.5 percent relative to the 2017 average
- Assessment (2017 estimates):
  - Indirect EBA current account assessment (elasticity 0.12): REER overvalued by 12 percent
  - EBA REER index model: overvaluation of 8 percent
  - EBA REER level model: overvaluation of 14 percent
  - External Sustainability Approach: REER overvaluation of 18 percent
  - Staff overall assessment: 2017 average REER moderately overvalued, in the 8-16 percent range, compared to the level implied by medium-term fundamentals and desirable policies
- Note: Recent currency depreciation has reduced the REER overvaluation gap

### Capital and financial accounts: flows and policy measures
- Net financial inflows: about 1.8 percent of GDP in 2017 (compared to 2.0 percent of GDP in 2016)
- Composition changes in 2017:
  - Net portfolio investments increased by 0.2 percent of GDP year over year
  - Other investments increased by 0.8 percent of GDP year over year
  - Increase partially offset by weaker net direct investments
- Assessment:
  - The U.S. has a fully open capital account
  - Vulnerabilities limited by:
    - The dollar’s status as a reserve currency
    - Foreign demand for U.S. Treasury securities supported by the stronger outlook for the U.S. economy compared to key trading partners
    - Possibly safe-haven flows

### FX intervention and reserves level
- Assessment:
  - The dollar has the status of a global reserve currency
  - Reserves held by the U.S. are typically low relative to standard metrics
  - The currency is free floating

### Public Debt Sustainability Analysis (overview and baseline projections)
- Context:
  - U.S. budget deficit started rising in 2016 after a decline during 2010-15
  - U.S. public debt-to-GDP ratio is on an unsustainable path
  - Tax cuts and discretionary spending increases enacted since late-2017 are adding to pressure on U.S. public finances
  - Gross financing needs are large but manageable given the global reserve currency status of the U.S. dollar
  - A credible medium-term fiscal adjustment featuring reprioritization of budget programs and revenue-gaining tax reform is needed to put public debt on a downward path
- Baseline (staff, based on current laws):
  - Federal debt held by the public:
    - about 77.4 percent of GDP in 2017
    - projected to increase to around 95.6 percent of GDP in 2027
  - General government gross debt:
    - about 107.8 percent of GDP in 2017
    - projected to rise to 120 percent of GDP in 2027

### Public debt: background on prior consolidation and recent legislation
- 2011–13: Significant fiscal consolidation measures legislated to tackle high public debt ratio
- Bipartisan Budget Acts of 2013, 2015, and 2018: partially reversed scheduled cuts since FY2014, partially replacing them with savings generated through cuts to mandatory spending in later years
- Tax Act of 2015 and Tax Cuts and Jobs Act of 2017:
  - Extended many tax cuts through the medium term and made some permanent
  - Introduced new tax cuts
  - These measures will lead to higher deficits in the medium and long term

### Adjustment scenario and recommended fiscal stance
- 2017 general government primary deficit: 2.5 percent of GDP
- Staff view: Aim for a medium-term general government primary surplus of about 1¼ percent of GDP (a federal government surplus of about 1½ percent of GDP) to put the public debt ratio firmly on a downward path
- Note: To bring the debt ratio closer to pre-crisis levels by 2030, the target primary surplus would have to be larger

### Debt servicing costs and interest-rate outlook
- Effective interest rate:
  - Currently still low level of 1 percent
  - Projected to rise gradually and reach 3.7 percent by 2027 (near its 2006–16 average level)
- Implication: Real interest rates will become a major debt-creating flow over the medium term

### Realism of baseline and stress test results
- Realism:
  - Baseline economic assumptions and fiscal projections are generally within the error band observed for all countries
  - Projected fiscal adjustment is ambitious but realistic based on consolidation episodes observed in 1990–2011
- Stress tests (sensitivity of public debt dynamics):
  - An increase of 200 basis points in the sovereign risk premium would raise the debt ratio to about 130 percent of GDP by 2027 (about 10 percentage points of GDP above the baseline)
  - Real GDP growth one standard deviation below the baseline would increase public debt by about 10 percentage points above the baseline by 2027
  - A scenario with a 1 percentage point of GDP larger fiscal deficit over the next two years would increase public debt by about 5 percentage points above the baseline in 2027
  - A combined macro-fiscal shock could raise the public debt ratio to as high as 145 percent of GDP by 2027
  - An exchange rate shock is unlikely to have important implications for U.S. debt sustainability given all debt is denominated in local currency and the reserve currency status of the dollar

### Mitigating factors
- Depth and liquidity of the U.S. Treasury market
- Safe-haven status of U.S. assets at times of distress

### Selected quantitative indicators and projections (as reported)
- Debt-stabilizing primary balance: 0.8
- Nominal gross public debt (selected entries from figure table):
  - 2007–2015: 93.3
  - 2016: 107.2
  - 2017: 105.6
  - 2027 (projection entries across figures): values shown include 116.5 (one table entry) and projections to 120 percent of GDP for general government gross debt by 2027
- Public gross financing needs (selected entries):
  - 2017: 28.3 (table entry)
  - Projections through 2027: values shown include 27.5, 28.1 in various rows and charts
- Real GDP growth (selected projections):
  - 2018: 2.9
  - 2019: 2.7
  - 2020: 1.9
  - 2027: 1.7 (repeated projection)
- Inflation (GDP deflator, percent) (selected projections):
  - 2018: 2.4
  - 2019: 2.8
  - 2027: 2.1
- Effective interest rate (percent) (selected projections):
  - Current: 1.0 (noted as currently still low level of 1 percent)
  - Projected to reach 3.7 percent by 2027 in text; table shows a trajectory rising to 4.6 in later projection rows
- Primary deficit and primary balance (selected):
  - 2017 general government primary deficit: 2.5 percent of GDP (text)
  - Primary deficit (table rows): 5.0 (2007–2015), 2.2 (2016), 2.5 (2017), with subsequent projected primary deficits and reductions noted through 2027
- Residual (including asset changes) (table selected entries):
  - 2007–2015: -0.3
  - 2016: 0.1
  - 2017: -2.4
  - Cumulative projection entries through 2027 show -1.8

*Source: IMF staff (content unit: cr18207 - 0.7 percent of GDP. The cyclically-adjusted CA gap is -1.5 perc)*

### Annex IV. Implementation of FSAP Recommendations

### Annex IV. Implementation of FSAP Recommendations

### Macroprudential framework and policy

- Recommendation 1: Provide an explicit financial stability mandate to all FSOC member agencies  
  - Developments: Several agencies continue to have no explicit legal mandate to support financial stability. As discussed in the 2015 FSAP, this can complicate their input to the Financial Stability Oversight Council (FSOC), and potentially undermines the response to the committee’s recommendations and macroprudential coordination. While not all FSOC agencies within their existing authorities have an explicit legal mandate to support financial stability, they all continue to make progress toward financial reforms. Some FSOC agencies, however (including the U.S. federal banking agencies), have, as their responsibilities, key roles in maintaining financial stability.  
  - Status: Not implemented

- Recommendation 2: Include in FSOC Annual Report specific follow-up actions for each material threat identified  
  - Developments: The FSOC’s 2015,2016, and 2017 Annual Reports discuss in a detailed manner each material threat identified, provides updates on regulations and other measures proposed or implemented in response to each threat, and outlines the research agenda. However, specific timelines and responsible agencies are not identified.  
  - Status: Partially implemented

- Recommendation 3: Publish the current U.S. macroprudential toolkit and prioritize further development  
  - Developments: The FSAP recommended that the FSOC should identify when macroprudential tools are needed, and promote the implementation of effective system-wide and time-varying macroprudential tools. The macroprudential toolkit remains to be centrally published, and a prioritization to be made.  
  - Status: Partially implemented

- Further FSAP guidance on time-varying macroprudential tools (e.g., CCyB, risk-weights, real estate tools)  
  - Findings and developments:  
    - Recommendation: Necessary final steps on application triggers required to implement the CCyB should be completed; the scope to alter risk-weights on particular types of lending needs to be assessed; macroprudential tools could be used in the real estate sector (e.g. by varying maximum loan-to-value and debt-to-income ratios).  
    - In September 2016, the Federal Reserve (FRB) approved a final policy statement detailing the framework for setting the countercyclical capital buffer (CCyB). The policy statement provides background on the range of financial-system vulnerabilities and other factors the FRB may take into account as it evaluates settings for the buffer, including but not limited to, leverage in the nonfinancial and financial sectors, maturity and liquidity transformation in the financial sector, and asset valuation pressures. Due to the constantly evolving nature of economic and financial risks, the FRB is likely to adapt the range of indicators and models over time. The FRB has re-assessed the level of the CCyB annually since adopting the policy statement. Most recently, in December 2017, the FRB affirmed the amount of the CCyB at 0 percent.

- Recommendation 4: Expedite heightened prudential standards for designated non-bank systemically important financial institutions (SIFIs)  
  - Developments:  
    - In 2015, the FRB adopted a comprehensive set of enhanced prudential standards (EPS) for General Electric Capital Corporation, Inc. (GECC), which was designated by the FSOC in July 2013 for Federal Reserve supervision. The EPS included capital and liquidity requirements, capital planning and stress testing requirements, financial risk management requirements, and restrictions on intercompany transactions between GECC and its parent. The FSOC rescinded the designation of GECC in June 2016 and AIG in September 2017.  
    - On June 3, 2016, the FRB approved an advance notice of proposed rulemaking (ANPR) inviting comment on conceptual frameworks for capital standards that could apply to systemically important insurance companies and to insurance companies that own a bank or thrift. The standards would differ for each population of insurance firms supervised by the FRB. In parallel, the FRB approved a notice of proposed rulemaking to apply EPS for the systemically important insurance companies as designated by the FSOC. In line with the Dodd-Frank Act (DFA), these proposed standards would apply consistent liquidity, corporate governance, and risk management standards to the firms and require the firms to employ both a chief risk officer and chief actuary.  
  - Status: Partially implemented

- Recommendation 5: Improve data collection, and address impediments to inter-agency data sharing  
  - Developments:  
    - The Office of Financial Research (OFR) Interagency Data Inventory (IDI), which catalogues the data that FSOC member agencies purchase or collect from the industry or derive from other data, had its annual update in March 2017. FSOC member agencies use the inventory for identifying data gaps and for improving research and analysis but, due to specific restrictions to data sharing, the listing of data in the inventory does not necessarily signify that all FSOC member agencies have access to all data sets. In support of FSOC, OFR facilitated a review of data sharing agreements to identify areas for standardization (see OFR 2016 Financial Stability Report).  
    - OFR, along with the FRB, New York Federal Reserve, and the Securities and Exchange Commission (SEC) have completed pilot data collections about bilateral repurchase agreements (repos) and securities lending activity. The OFR has made the summary of findings publicly available on its website.1  
    - Steady progress in data collection and sharing is being made, including areas previously identified as those where more work needs to be done: (i) The collection of data on securities lending, and bilateral repos is still at an early stage; (ii) outstanding obstacles to interagency data sharing should be reduced, as recommended in the FSAP.  
  - Status: Partially implemented

*Annex IV. Implementation of FSAP Recommendations — United States, as provided in the source content.*

### Section 21(c)(7) of the Commodity Exchange Act directs swap

### Section 21(c)(7) of the Commodity Exchange Act directs swap

### Swap data access and CFTC rulemaking
- Section 21(c)(7) directs swap data repositories to make swap data available to certain enumerated domestic authorities and any other entity the Commodity Futures Trading Commission (CFTC) determines to be appropriate, which may include certain types of foreign authorities.
- In 2011, the CFTC adopted rules implementing these statutory swap data access provisions by establishing processes by which various categories of entities could gain access to swap data held by swap data repositories.
- In January 2017, the CFTC issued a proposed rule to amend the 2011 access requirements such that certain authorities may obtain swap data access efficiently.

### Regulation and supervision — overall assessment and coordination
- The multi-agency supervisory framework established by statute requires coordination to avoid duplication of supervision and potential uncertainty when rules or guidance appear contradictory.
- The Federal Financial Institutions Examination Council (FFIEC) is used as a forum to promote consistent approaches to bank supervision; agencies also rely on regular informal communication.
- Consumer protection responsibility lies with the Consumer Financial Protection Bureau (CFPB) and the relevant federal banking agency; an MOU exists to coordinate exam scheduling and require sharing of exam reports and consideration of comments prior to issuance to institutions.
- Federal banking agencies’ mandates are established by statute and have not been redefined since enactment of the Dodd-Frank Act (DFA).
- Safety and soundness are examined under the Uniform Financial Institutions Rating System, but safety and soundness have not been given primacy to the exclusion of consumer compliance objectives.

### Supervisory objectives and implementation status (selected recommendations)
- Recommendation 6: "Give primacy to safety and soundness in the supervisory objectives of Federal Banking Agencies" — Status: Partially implemented.
- Recommendation 7: "Strengthen the banking supervisory framework and limit structures for related party lending and concentration risk; and update guidance for operational and interest rate risk" — Status: Partially implemented.
  - Regulation XX (November 2014) implements Section 622 of the DFA establishing a financial sector concentration limit: prohibits a financial company from merging or acquiring control if resulting company's liabilities would exceed 10 percent of the aggregate consolidated liabilities of all financial companies.
  - March 2016 FRB proposal to address single-counterparty credit risk would apply credit limits to Bank Holding Companies (BHCs) with total consolidated assets of $50 billion or more, with differentiated exposure limits:
    - GSIBs restricted to a credit exposure of no more than 15 percent of the firm’s Tier 1 capital to another systemically important financial firm, and up to 25 percent of the firm’s tier 1 capital to another counterparty.
    - Non-GSIB BHCs with $250 billion or more in total consolidated assets, or $10 billion or more in on-balance-sheet foreign exposure, restricted to a credit exposure of no more than 25 percent of the firm’s tier 1 capital to another counterparty.
    - BHCs with $50 billion or more in total consolidated assets restricted to a credit exposure of no more than 25 percent of the firm’s total regulatory capital to another counterparty.
    - BHCs with less than $50 billion in total consolidated assets, including community banks, would not be subject to the proposal.
  - Comparable supervisory guidance on other risk concentrations remains outstanding; separate limits for money market investments and security holdings for banks (but not federal savings associations) leave possibility of excessive risk concentrations.
  - Guidance on operational risk and interest rate risk: agencies participating in Basel III Standardized Approach and revising US capital rules to move away from the AMA; US guidance on IRR requires oversight of models and scenario analysis consistent with the April 2016 Basel IRR standard.
  - Limit structures for related party lending: No progress toward implementation of the FSAP recommendation.
- Recommendation 8: "Set up an independent insurance regulatory body with nationwide responsibilities and authority" — Status: Not implemented.
- Recommendation 9: "Implement principle-based valuation standard for life insurers consistently across the states" — Status: Partially implemented.
  - Principle-based Reserving Valuation Manual became operative on January 1, 2017 for 45 States and territories that adopted it; some States have not adopted the standard and risk model approvals remain at State level.
- Recommendation 10: "Develop and implement group supervision and group-level capital requirements for insurance companies" — Status: Partially implemented.
  - April 2016 FRB approved proposed consolidated financial reporting requirements for systemically important insurance companies designated by FSOC.
  - June 2016 FRB approved an ANPR on conceptual frameworks for capital standards for systemically important insurance companies and insurers that own a bank or thrift.
  - June 2016 FRB approved a notice of proposed rulemaking to apply enhanced prudential standards to FSOC-designated systemically important insurance companies, including liquidity, corporate governance, risk management, and requirement to employ a chief risk officer and chief actuary.
  - NAIC group capital calculation work continues with a timeline through 2017 and 2018; as of June 2017 all 50 states, DC, and Puerto Rico adopted updated NAIC model holding company act enhancing group supervisory authorities.

### Market conduct, SEC/CFTC resources, and asset manager oversight
- Recommendation 11: "Provide needed resources to the SEC and CFTC and enhance their funding stability" — Status: Partially implemented.
  - Information on SEC and CFTC funding for Fiscal Year 2018 is available (URLs provided in the source).
- Recommendation to increase examination coverage of asset managers: Implemented.
  - SEC examined 11 percent of investment advisers in fiscal year 2016, 15percent of investment advisers in fiscal year 2017, and expects to examine 15percent of investment advisers in fiscal years 2018 and 2019.
- Recommendation 12: "Introduce explicit requirements on risk management and internal controls for asset managers and commodity pool operators" — Status: Partially implemented.
  - FSOC published an April 2016 update on asset management risks emphasizing operational risk.
  - SEC adopted rules in October 2016 requiring open-end funds to have liquidity risk management programs with required elements.

### Market-structure and stress testing
- Recommendation 13: "Complete the assessment of equity market structure and address regulatory gaps" — Status: Implemented.
  - SEC proposed enhancements for ATSs and approved the consolidated audit trail; ongoing staff roundtables and published market structure analysis.
- Recommendation 14: "Conduct liquidity stress testing for banks and nonbanks on a regular basis; run regular network analyses; and link liquidity, solvency, and network analyses" — Status: Partially implemented.
  - CCAR and DFA stress tests are supervisory solvency stress tests; second-round effects not explicitly incorporated but implicitly captured via severe macro scenarios and a global market shock based on second half of 2008 movements.
  - Liquidity Coverage Ratio (LCR) finalized; Net Stable Funding Ratio (NSFR) proposed in 2016 for BHCs with at least $50 billion in assets.
  - Authorities do not yet conduct regular liquidity stress tests on nonbanks; SEC requires MMFs to conduct regular stress tests and adopted open-end fund liquidity risk management rules (October 2016).
  - Network analysis and integration with liquidity/solvency stress tests remain limited; OFR conducted related research.
  - Federal Reserve conducts an annual review of liquidity stress testing practices for systemically important banking organizations, assessing liquidity positions and firms' internal stress tests.

### Insurance and asset management stress testing
- Recommendation 15: "Develop and perform regular insurance stress tests on a consolidated group-level basis" — Status: Partially implemented.
  - State insurance regulators assess ORSA under the Risk Management and Own Risk Assessment Model Act adopted by 47 states; ORSA will be an NAIC accreditation requirement on January 1, 2018.
  - No macroprudential insurance sector stress testing currently performed by regulators; group capital calculation timeline estimated stress testing process could begin in fall of 2017.
- Recommendation 16: "Develop and perform regular liquidity stress tests for the asset management industry" — Status: Partially implemented.
  - FSOC’s April 2016 update focused on liquidity and redemption risk, leverage risk, operational risk, securities lending risk, and firm resolvability.
  - SEC finalized rules October 2016 requiring open-end funds to have liquidity risk management programs including evaluation of liquidity in normal and reasonably foreseeable stressed conditions, cash flow projections, disclosure requirements, and enabling swing pricing.
  - February 2018: SEC delayed compliance dates by six months for asset liquidity classification requirements of its liquidity rules.
  - March 2018: SEC proposed amendments to public liquidity-related disclosure requirements for certain open-end investment management companies to replace pending Form N-PORT quarterly aggregate liquidity classification profiles with annual report discussion of operation and effectiveness of liquidity risk management.

### Market-based finance, MMMFs, and money markets
- Recommendation 17: "Change redemption structures for mutual funds (MF) to lessen incentives to run; move all money market mutual funds (MMMFs) to variable net asset value (NAV) approaches" — Status: Partially implemented.
  - FSOC endorsed considering tools to allocate redemption costs more directly to redeeming investors, reduce first-mover advantage, and stress testing expectations.
  - SEC’s September 2015 proposed rule for MFs and ETFs aimed to enhance liquidity risk management, disclosure, and allow swing pricing; October 2016 SEC rules mandated enhanced reporting and liquidity risk management for open-end funds and permitted swing pricing under certain circumstances.
  - SEC rules require floating NAVs for institutional prime MMMFs but allow retail and government MMMFs to continue amortized cost constant NAV pricing; rules were fully implemented in October 2016. Retail and government MMMFs retain liquidity fees and redemption gates as tools.
- Recommendation 18: "Complete triparty repo (TPR) reforms and measures to reduce run-risk, including possible use of a central clearing platforms (CCPs)" — Status: Implemented.
  - Intraday credit extended to collateral providers reduced by over 95 percent due to reform roadmap changes.
  - Clearing banks now limited to funding a maximum of 10 percent of a dealer’s notional tri-party book through pre-committed lines (incurring a capital charge).
  - Risks remain: potential for collateral fire-sales by dealers losing access to repo or creditors; data gaps limit regulators’ ability to monitor aggregate repo market and interdependencies; regulators must monitor responses to new SEC MMF rules and other cash management vehicles.
- Recommendation 19: "Enhance disclosures and regulatory reporting of securities lending" — Status: Partially implemented.
  - OFR, FRB, and SEC completed a joint securities lending data collection pilot in early 2016 from seven voluntary lending agents.
  - FSOC in April 2016 called for permanent securities lending data collection; SEC adopted new reporting requirements for registered investment companies in October 2016, but delayed portfolio-level reporting requirements for large investment companies from July 2018 to April 2019.
  - Registered investment companies required to comply with other reporting requirements, including providing annual information regarding securities lending, on June 1, 2018.
- Recommendation 21: "Improve data availability across bilateral repo/triparty repo and securities lending markets" — Status: Partially implemented.
  - OFR’s Bilateral Repo Data Collection Pilot Project underway; triparty and GCF repo market data published regularly.
  - More work needed on securities lending data collection and on bilateral repo information collection; information collection is at an early stage.

### Broker-dealer regulation, uncleared swaps margin, and FMIs
- Recommendation 20: "Strengthen broker-dealer regulation, in particular liquidity and leverage regulations" — Status: Partially implemented.
  - Regulatory measures include margin rules, central clearing of derivatives, and margin requirements for uncleared swaps.
  - SEC proposed funding liquidity stress test requirements for VaR-model broker-dealers; largest broker-dealers providing additional liquidity information to SEC staff.
  - December 2015: FRB, FDIC, OCC, FCA, and FHFA issued final rule on capital and margin for common swap entities; separate final rule specified exemptions. Initial margin and variation margin compliance phased from September 2016 to March 2017, with initial margin phased-in through September 2020.
  - January 2016: CFTC final rule on margin for uncleared swaps; May 2016 publication on cross-border application; phase-in starting September 1, 2016 for initial margin; variation margin effective March 1, 2017; comparability determinations issued for Japan (September 2016) and EU (October 2017).
- Recommendation 28 and FMIs: "Identify and manage system-wide risks related to interdependencies among FMIs, banks, and markets" — Status: Implemented.
  - U.S. authorities adopted risk management standards for systemically important FMIs, including recovery and orderly wind-down planning; implemented regulatory requirements for recovery plans; engaged in resolution planning and hosted CMG meetings for system CCPs.
  - CFTC issued final cybersecurity testing rules for FMIs and markets (September 2016).
  - U.S. participation in SGCCI and CPMI-IOSCO outputs: contributed to CPMI-IOSCO’s Framework for Supervisory Stress Testing of CCPs, Resilience of CCPs, and Recovery of FMIs; contributed to FSB CCP resolution and continuity of access work streams.
  - By December 2017, Federal Reserve Banks of Chicago and New York authorized requests from designated Financial Market Infrastructures; as of May 1, 2018 there are no outstanding requests.
  - Five U.S. clearinghouses authorized to open Fed accounts: ICE Clear Credit, CME Inc., the Options Clearing Corporation, the National Securities Clearing Corporation, and the Fixed Income Clearing Corporation (designation as systemically important utilities enabled this).

### Liquidity backstops, crisis preparedness, resolution, and housing finance
- Recommendation 22: "Revamp the Primary Credit Facility as a monetary instrument" — Status: Not implemented.
  - Federal Reserve evaluating elements of long-run operating framework; stigma associated with discount window discussed at November 2016 FOMC meeting.
- Recommendation 23: "Enable the Fed to lend to solvent non-banks that are designated as systemically important" — Status: Partially implemented.
  - November 2015 FRB final rule specifies emergency lending procedures under Section 13(3) of the Federal Reserve Act; defines "broad-based" programs/facilities and limits aiding failing firms; solvent FSOC-designated non-banks could participate in broad-based facilities if eligible.
- Recommendation 24: "Assign formal crisis preparedness and management coordinating role to FSOC" — Status: Not implemented.
  - FSOC has not been formally assigned crisis preparedness and management; used as forum for regulators on fast-emerging topics.
- Recommendation 25: "Extend the Orderly Liquidation Authority powers to cover systemically-important insurance companies and U.S. branches of foreign-owned banks" — Status: Partially implemented.
  - Systemically important U.S. insurance holding companies can be resolved using OLA powers; resolution of individual legal entity insurance subsidiaries remains in State-based regime; State tools have been used historically but not tested on subsidiaries of a systemically important holding company.
  - Single Point of Entry strategy generally would not affect U.S. branches of foreign banks.
- Recommendation 26: "Adopt powers to support foreign resolution measures; extend preference to overseas depositors" — Status: Partially implemented.
  - Depositor preference rules applicable to insured depository institutions can complicate coordination and increase likelihood of ring-fencing; host authorities could require branches to amend deposit agreements to extend preference to branch depositors.
- Recommendation 27: "Finalize recovery and resolution plans for SIFIs, agree cooperation agreements with overseas authorities" — Status: Partially implemented.
  - Recovery planning responsibilities assigned to firms’ senior management and boards; OCC guidelines (September 29, 2016) establish enforceable recovery planning standards for institutions with average total consolidated assets of $50 billion or more.
  - FDIC developed resolution plans for G-SIFIs consistent with Key Attributes.
  - Living wills reviewed by FRB and FDIC since 2012; December 2017 feedback to eight largest domestic BHCs identified four areas needing work: intra-group liquidity; internal loss-absorbing capacity; derivatives; payment, clearing, and settlement activity. Next submissions expected in July 2019.
  - Firm-specific cooperation agreements executed for all U.S. G-SIBs and for one U.S. G-SII.
  - December 2016 FRB final rule imposes TLAC and long-term debt requirements on eight U.S. GSIBs and on U.S. IHCs of foreign GSIBs; final rule consistent with FSB TLAC but stricter in some respects and imposes clean holding company requirements.

- Recommendation 29: "Reinvigorate the momentum for comprehensive housing market reform" — Status: Not implemented.
  - No comprehensive legislative or executive reform of Fannie Mae and Freddie Mac; FHFA as conservator required market-based credit risk transfers since 2013 and joint development of common securitization platform with announcement of new uniform mortgage-backed security starting June 2019 (administrative reforms only).
  - FHFA directed Enterprises to fund Housing Trust Fund and Capital Magnet Funds and reinstated a $3 billion capital reserve amount for each Enterprise on December 21, 2017; December 2017 tax cuts caused Enterprises to draw a combined total of $4 billion at the end of that quarter.
  - Policymakers evaluating potential comprehensive overhaul options; CBO provided analyses of alternatives.
  - 2018 legislative action: U.S. Senate passed S. 2155 (The Economic Growth, Regulatory Relief and Consumer Protection Act) emphasizing regulatory relief for small banks and credit unions and amending Dodd-Frank; June 12, 2017 Treasury published "A Financial System that Creates Economic Opportunities: Banks and Credit Unions."

*Source: cr18207 - Section 21(c)(7) of the Commodity Exchange Act directs swap*

### 1986.  Core elements of the tax plan include the following:

### 1986.  Core elements of the tax plan include the following:

### Tax reform — corporate and international provisions
- A reduction in the U.S. corporate tax rate from 35 percent to 21 percent.
- Rationale: For many years, the United States had the highest corporate tax rate among major economies, which discouraged investment in the United States.
- Characterization: The 21 percent rate is slightly below the OECD average and is not a “race to the bottom.”
- Complementary measures: The new rate is accompanied by tax reform and changes in international tax provisions that could stimulate a race to better policies globally.
- Alignment with international norms: The alignment of the U.S. international tax system with the territorial systems of most U.S. trading partners and implementation of many recommendations from the G-20/OECD BEPS project, consistent with the theme of combating stateless income.
- Measures to limit profit shifting and base erosion:
  - Imposition of a U.S. tax on low-taxed excess earnings of controlled foreign corporations of U.S. parented groups on which U.S. tax was previously deferred.
  - Limitation of base erosion via interest and other deductible payments.
- Personal tax changes:
  - Simplification of the personal tax system and temporarily lowering marginal tax rates across all income levels, with the largest benefits for the middle class.
  - Reform of the Alternative Minimum Tax.
  - Almost doubling the standard deduction.
  - Bolstering the child credit system to support working families.

### Fiscal outlook and budgetary measures
- The FY 2019 Budget projects a deficit of 4.7 percent of GDP in FY 2019, a moderate increase from the estimated 4.2 percent of GDP for FY 2018.
- Over the ten-year budget window, the Administration’s proposals aim to reduce NDD spending by over 40 percent in real terms, and restrain spending in mandatory programs, including by reforming health care.
- Statement: "We recognize these objectives will require considerable effort."

### Infrastructure initiative
- The Administration’s infrastructure plan adds $200 billion in federal spending over FY 2019-2028, aimed at generating $1.5 trillion in overall public and private investment.
- Of the $200 billion in the infrastructure initiative, $100 billion will create an Incentives Program that matches states/localities up to 20 percent for new dedicated revenue streams for qualified infrastructure investments.
- Expected effects: These measures will improve the U.S. overall capital stock and thereby boost potential growth. Higher growth will fuel higher government revenues, which, coupled with a decline in NDD spending, will put the headline deficit on a downward path as a percent of GDP.

### Monetary policy
- The Federal Reserve continues to make progress toward its goal of maximum employment and price stability.
- Labor market: The unemployment rate fell to 3.8 percent in May from 4.3 percent a year earlier. Job gains have been strong in recent months, while wage growth has moderately increased. Broad measures of labor market slack have also fallen, though the degree of slack remains somewhat inconclusive.
- Inflation: Inflation has moved up from a year ago, with personal-consumption expenditure inflation close to the Federal Open Market Committee’s (FOMC) target of 2.0 percent.
- FOMC outlook and stance:
  - The FOMC judges that the economy will continue to expand at a moderate pace over the medium-term and that labor market conditions will remain strong.
  - Inflation is expected to run near the FOMC’s 2.0 percent objective over the medium-term, and risks to the economic outlook appear balanced.
  - The FOMC expects that improving economic conditions will warrant further gradual federal funds rate increases to sustain a healthy labor market and stabilize inflation around its target.
  - According to the FOMC, the stance of policy remains accommodative.
  - The FOMC has repeatedly stated that the monetary policy path is not on a preset course and will remain data dependent.
  - The FOMC remains committed to clear policy communication.
- Balance sheet normalization: The FOMC began implementing a balance sheet normalization program last fall. The approach has been well-communicated and has been implemented in a regular and predictable manner. The balance sheet is not intended to be an active tool for monetary policy in normal times, while the FOMC is prepared to adjust the details of its approach to policy normalization considering economic and financial developments.

### Financial regulation and system soundness
- Legislation: The President recently signed the Economic Growth, Regulatory Relief, and Consumer Protection Act.
  - Purpose: Modernizes and recalibrates financial regulation to help banks, particularly community and regional banks, more efficiently and effectively allocate capital to businesses and consumers.
  - Assessment: This bill strikes the appropriate balance between addressing risks to the financial system and facilitating economic growth.
- Financial stability assessment:
  - The U.S. financial system is on strong footing, with moderate financial stability risks.
  - Most large U.S. banks remain well-capitalized and highly liquid, and reliance on short-term wholesale funding has continued to decline.
  - Higher valuation pressure across a range of asset markets has not been accompanied by increased leverage in the financial sector.
  - Recent financial market volatility has not materially impacted financial sector soundness, and large financial institutions are well positioned to absorb further financial market stress should it materialize.

### Trade and external sector policy
- Trade orientation: The United States has one of the most open trade policy regimes and economies in the world. The Administration seeks to promote fair and reciprocal trade, and to press for a level playing field for U.S. firms.
- Policy stance: The Administration believes that all countries should remove barriers to trade but will no longer accept being in a position in which the unfair practices of trading partners harm U.S. firms and workers.
- Policy objectives: Policies are intended to address circumstances where injurious market distortions have occurred; where critical U.S. national security concerns are relevant; or where the playing field for U.S. firms and workers is otherwise not level.
- Response to Fund staff assessment: The Administration strongly disagrees with Fund staff’s assessment that recent trade measures would move the globe further from an open, fair, and rules-based trade system. Instead, the Administration’s trade policies seek to move the global economy closer to a free, fair, and reciprocal trading system.

### Competition policy and market power
- Fund staff focus: The Administration notes Fund staff’s focus on competition issues in the United States and believes the topic deserves academic attention by relevant experts.
- Disagreement with staff conclusions:
  - Evidence pointing to a broad trend in increased market power is inconclusive.
  - The developing literature does not uniformly find markups trending upward.
  - Higher estimated markups do not necessarily provide a reliable measure of market power; a higher estimated markup also could be the result of costs being driven down, with some portion of the marginal cost savings passed through to consumers.
  - The relationship between higher markups and competition policy is unclear, making it difficult to define policy implications, including staff’s recommended tax scheme.
  - Statement: "We do not see a strong economic argument for imposing a tax that could discourage firms from lowering their costs to their own benefit and that of their customers."

*IMF Country Report content unit: cr18207*

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_Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18207.pdf_