## 1usaea2019001 ## Source details **Canonical URL:** [1usaea2019001](https://www.imf.org/-/media/files/publications/cr/2019/1usaea2019001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1usaea2019001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1usaea2019001.pdf.json) --- ### Macro-Financial Links Between Household Wealth and Consumption - Households' consumption responds relatively little to changes in financial wealth; rising housing prices provide support to household consumption, particularly for those at the lower end of the income distribution. - Marginal propensity to consume (MPC) out of housing wealth: around 4-5 cents per year for each US$1 dollar increase in housing wealth (net of mortgage and home equity loans). - Consumption response to changes in other forms of wealth—including holdings of financial assets—appears to be not statistically different from zero. - A persistent, broad-based 10 percent change in house prices would change aggregate consumption by around 1–1.4 percent. - Heterogeneity: - Working age individuals have a larger consumption response to housing wealth gains than older cohorts. - Low-income homeowners respond most to increases in housing wealth. - Homeowners with an outstanding stock of credit increase consumption more in response to rising home equity than those without credit; this incremental effect is larger for those with lower incomes. - Methodology and sample: - Econometric model using household-level survey data. - Panel covers 1999-2017 across a sample of about 8,000 households with time fixed effects and controls for various household-specific characteristics. - Quantitative estimates (preserved exactly): - MPC out of housing wealth: around 4-5 cents per year for each US$1 dollar increase in housing wealth (net of mortgage and home equity loans). - Aggregate consumption effect of a persistent, broad-based 10 percent change in house prices: around 1–1.4 percent. - Sample size: about 8,000 households. - Panel period: 1999-2017. - Policy implications: - Housing price increases can materially support household consumption, especially among cash-constrained and lower-income homeowners. - Policies that affect homeowners' ability to extract home equity (for example, through mortgage or home-equity loan markets) can influence consumption dynamics. - Limited consumption response to financial asset wealth suggests non-housing asset-price channels may have muted effects on aggregate consumption relative to housing. ### Financial System Oversight and Regulatory Changes (since 2018 Article IV) - Changes in oversight: - Prudential standards for banks between US$50-100 billion in assets have been lowered, including for liquidity, capital, risk management requirements, and resolution plans. - Bank holding companies with less than US$3 billion in assets will be allowed to incur more debt and are now exempt from minimum capital requirements at the consolidated level; depository institutions that are part of the holding company will still be subject to minimum capital requirements. - The qualitative assessment in the Comprehensive Capital Analysis and Review process will be phased out. - Proposed changes: - Federal Reserve proposed reducing the enhanced supplementary leverage ratio for GSIBs from 6 percent of assets to 3 percent of assets plus a buffer of one-half of the entity’s risk-based capital surcharge. - FSOC proposed replacing size-based designation of nonbank financial companies with an activities-based approach. - Federal Reserve proposed sorting domestic banks into four categories based on asset size and other risk indicators: - Category I and II: little change. - Category III (US$250-750 billion): less restrictive capital and liquidity standards; company-run stress tests every other year. - Category IV (US$100-250 billion): relieved from LCR and NSFR and company-run stress tests; less frequent supervisory stress tests. - Consideration of a framework for sorting foreign banks into categories with calibrated requirements. ### FSAP Recommendations and Macroprudential Framework - Key FSAP priorities: - 1 Provide an explicit financial stability mandate to all FSOC member agencies. - 2 Include in FSOC Annual Report specific follow-up actions for each material threat identified. - 3 Publish the current U.S. macroprudential toolkit and prioritize further development, including final steps to implement the countercyclical capital buffer (CCyB); FRB affirmed CCyB at 0 percent (March 2019). - 4 Expedite heightened prudential standards for designated non-bank SIFIs; currently no companies designated by FSOC for Federal Reserve supervision and enhanced prudential standards. - 5 Improve data collection and reduce impediments to inter-agency data sharing; OFR Interagency Data Inventory (IDI) updated March 2017. - Macroprudential tools and coverage: - NAIC Macro Prudential Initiative (MPI) focus areas include liquidity stress testing for material life insurance groups, capital stress testing, recovery and resolution processes review, and counterparty exposure disclosures. - Recommendation that FSOC identify when macroprudential tools are needed and promote time-varying tools such as varying loan-to-value and debt-to-income ratios for real estate. ### Financial Stability: Stress Testing, Liquidity, and Resolution - Stress testing and liquidity: - CCAR and DFA stress tests continue as supervisory solvency stress tests incorporating macro scenarios based on very severe recessions. - LCR implemented in 2014; NSFR proposed in 2016. - Liquidity stress testing for nonbanks is not conducted regularly by authorities; SEC requires MMMFs to conduct regular stress tests. - Resolution and recovery: - Orderly Liquidation Authority (OLA) available for systemically important insurance holding companies; state regimes retain resolution powers for insurance subsidiaries. - TLAC and long-term debt requirements imposed on eight U.S. G-SIBs and on U.S. IHCs of foreign GSIBs (December 2016 FRB final rule). - Living wills reviewed; joint feedback identified areas needing more work (intra-group liquidity, internal loss-absorbing capacity, derivatives, payment systems). - FDIC and FRB issued final resolution plan guidance; next submissions from U.S. G-SIBs expected July 2019. ### Socioeconomic Mobility, Education, and Social Outcomes - Socioeconomic mobility: - Mean probability that a child earns more than their parents declined from almost 90 percent for those born in the 1940s to 50 percent for the current cohort of young adults (Chetty and others, 2017). - Geographic mobility: Only 10 percent of the population moved in 2018. - Income and wealth concentration: - Top 1 percent’s share of national income has increased; bottom 50 percent’s income share has declined. - Bottom 50 percent of the population has maintained close to zero net wealth throughout the last 50 years. - Education and student debt: - U.S. devotes around 3 percent of GDP to tertiary education. - A bachelor’s degree garners 60–80 percent more income relative to a high school degree; recent cohorts show declining lifetime wealth premium from college. - College tuition (net of financial aid) has risen by around 4 percent per year over the past decade. - Average student debt now totals US$37,172 per recent college graduate. - 2.2 million Americans have student debt in excess of US$100,000. - Only 60 percent of enrollees in four-year colleges graduate within 6 years. - Less than one-half of 25-34 year-olds have an undergraduate degree. - K-12 and outcomes: - Most U.S. states spend less today on K-12 education than prior to the financial crisis. - Wide discrepancies in per-student funding and uneven access to publicly-funded pre-K. - U.S. high school students score below most G-7 countries in math and reading tests. - Social and macro links: - Poverty and lack of human capital reduce labor force participation, raise incarceration, worsen education and health outcomes, and suppress aggregate demand. - Policy recommendations: - Family-friendly benefits: require paid family leave; means-tested assistance to defray child and dependent care. - Support the poor: expand EITC eligibility and generosity, consider increasing federal minimum wage, upgrade social assistance to simplify and increase generosity, smooth phase-outs, extend income eligibility limits. - Healthcare: protect gains in coverage for lower income households; pilot programs and pricing transparency to contain healthcare inflation; deploy programs to counter opioid addiction. - Education: prioritize early childhood education and universal pre-K; redesign public school funding to reduce district differentials; expand apprenticeship and vocational programs; increase college preparation and retention supports. ### Budgetary Process, Fiscal Policy, and Government Shutdown Lessons - Budgetary dysfunction: - The prolonged government shutdown demonstrates dysfunction in the U.S. budgetary process and creates policy-induced uncertainty with negative global spillovers. - Institutional suggestions to avoid brinkmanship: - Shift to a two-year budget cycle for annual spending levels. - Introduce automatic continuing funding provisions if appropriations cannot be met. - Consider legislative triggers for automatic revenue or spending adjustments if fiscal targets are breached. - Replace the debt ceiling with a bipartisan medium-term fiscal objective or design legislation to automatically adjust the debt ceiling once appropriations are struck. - Administration’s budget views: - President’s Budget proposes reaching a federal primary surplus of 1.8 percent of GDP by 2029 without increases in federal taxes. - “Two-penny” plan: reduces non-defense discretionary funding by two percent per year from 2021 to 2029. - Infrastructure proposal: provide up to US$200 billion in federal funding to incentivize up to US$2 trillion in infrastructure projects over the next 10 years. - Immigration proposal: increase the share of legal immigrants selected based on skill or merit from 12 percent to 57 percent. ### Monetary Policy, Operating Framework, and Communication - Fed policy stance and communications: - After December rate increase, median Fed members envisaged 75 basis points increase in the federal funds rate in 2019-20 (December meeting). - By early January, Chair Powell emphasized being “listening sensitively...”, “patient...”, and “prepared to adjust policy quickly and flexibly...”. - January FOMC removed forward bias for further gradual increases; March FOMC: most participants envisaged no further policy rate increases in 2019. - Inflation dynamics: - Core PCE inflation persistently below other measures such as trimmed mean or median PCE. - Recommendation: defer further policy rate increases until greater signs of wage or price inflation are evident. - Staff baseline: U.S. economy expected to continue growing faster than potential this year and next; policy rate forecast to resume gradual upward path later in 2019 or during 2020; both core and headline PCE inflation modestly overshoot 2 percent in 2020. - Operational framework suggestions: - Consider a standing repo facility to cap spikes in money market rates. - Consider moving away from the federal funds rate as the operating target toward a broader measure of overnight borrowing cost. - Consider returning to a point target for the chosen policy rate rather than a target range. - With the federal funds rate moving above the rate on excess reserves, ending balance sheet normalization by year-end appears warranted. ### Trade Policy, Tariffs, and International Spillovers - Recent measures and proposals: - May 23 notice of proposed rulemaking to allow countervailing duties on countries viewed as subsidizing exporters by undervaluing currencies; raises WTO and policy consistency questions. - May 30 invocation of the International Emergency Economic Powers Act to impose a 5 percent tariff on all goods imported from Mexico starting June 10, with monthly 5 percent increments up to 25 percent on October 1 unless immigration actions are taken. - Tariffs remain on steel, aluminum, and certain household appliances; tariffs on US$200 billion of imports from China increased to 25 percent (with potential for further expansion). - Policy guidance: - Global economy needs a more open, stable, and transparent rules-based trade system. - Swift resolution of U.S.-China tensions through a comprehensive agreement is preferred over managed trade deals. - Tariff measures are likely ineffective at containing bilateral trade deficits and damaging to U.S. and global macroeconomic outturns. - U.S. external imbalance should be addressed through fiscal adjustment and supply-side reforms. ### Governance, AML/CFT, and Beneficial Ownership - FATF Mutual Evaluation (2016) findings: - U.S. substantially effective at investigating and prosecuting money laundering and cooperating over corruption proceeds. - Complex legal structures and high-end real estate sector vulnerability identified. - Since 2010, DOJ’s Kleptocracy Asset Recovery Initiative has restrained US$2.8 billion and repatriated over US$150 million. - Identified weaknesses: - Measures to prevent abuse of companies are inadequate; lack of readily accessible beneficial ownership information hampers investigations. - U.S. only complies partially with preventive requirements for regulated firms regarding beneficial ownership identification and verification for customers and PEPs. - Non-prosecutorial actions: December 2017 Executive Order on national emergency re: corruption led to 66 corruption-related designations (as of May 16, 2019). - Major improvements needed to make lawyers, accountants, and trust and company service providers subject to customer due diligence and suspicious transaction reporting obligations. - Action needed to address money laundering risks in high-end real estate; real-estate agents not subject to comprehensive AML/CFT requirements. - Authorities’ stance: - Recognized importance of addressing corruption, prosecutorial efforts, sanctions designations, and advisories; committed to work with Congress on potential legislative solutions for beneficial ownership collection. ### Staff Appraisal: Outlook, Risks, and Policy Recommendations - Macroeconomic outlook: - U.S. economy in the longest expansion; unemployment at levels not seen since late 1960s. - Economic activity expected to slow to around 2.6 percent this year and 1.9 percent in 2020. - Financial stability risks: - Medium-term risks rising: elevated leveraged corporate indebtedness, leveraged lending, and potential nonbank vulnerabilities. - Abrupt reversal of supportive financial market conditions is a material downside risk with global spillovers. - Fiscal sustainability: - U.S. public debt is on an unsustainable path; policy adjustments needed to lower the fiscal deficit and place public debt on a gradual downward path. - IMF staff recommendation: fiscal consolidation aiming at a medium-term general government primary surplus of about 1 percent of GDP (a federal government primary surplus of about 1¾ percent of GDP). - Monetary policy: - Further increases in the federal funds rate should be deferred until greater signs of wage or price inflation are evident. - Monetary policy has appropriately paused given falling inflation and anchored expectations. - AML/CFT and external sector: - Ensure timely access to beneficial ownership information; strengthen identification/verification for customers and PEPs; make lawyers, accountants, and trust and company service providers subject to customer due diligence and suspicious transaction reporting obligations. - External position judged moderately weaker than implied by fundamentals in 2018; current account deficit expected to rise modestly over the medium-term. ### Key Macroeconomic Projections and Indicators (selected) - Real GDP: 2.9 (2018); 2.6 (2019); 1.9 (2020); 1.8 (2021); 1.7 (2022); 1.6 (2023); 1.6 (2024). - Real GDP (q4/q4): 3.0 (2018); 2.3 (2019); 1.9 (2020); 1.7 (2021); 1.7 (2022); 1.6 (2023); 1.6 (2024). - Private final consumption: 2.6 (2018); 2.3 (2019); 2.2 (2020); 1.9 (2021); 1.8 (2022); 1.6 (2023); 1.6 (2024). - Personal saving rate (% of disposable income): 6.8 (2018); 6.5 (2019); 6.4 (2020); 6.3 (2021); 6.2 (2022); 6.2 (2023); 6.2 (2024). - Unemployment rate: 3.9 (2018); 3.6 (2019); 3.5 (2020); 3.6 (2021); 3.7 (2022); 3.8 (2023); 3.8 (2024). - CPI inflation (q4/q4): 2.2 (2018); 2.4 (2019); 2.6 (2020); 2.3 (2021); 2.2 (2022); 2.2 (2023); 2.2 (2024). - Core PCE Inflation (q4/q4): 1.9 (2018); 1.8 (2019); 2.1 (2020); 2.1 (2021); 2.0 (2022); 2.0 (2023); 2.0 (2024). ### Public Debt Sustainability and Stress Tests (Appendix III) - Baseline projections (current laws): - Federal debt held by the public: about 76 percent of GDP in 2018; around 87 percent of GDP in 2028. - General government gross debt: about 106 percent of GDP in 2018; 111 percent of GDP in 2028. - Staff targets and recommendations: - Observed 2018 general government primary deficit: 2.6 percent of GDP. - Staff view: gradually raising the primary general government surplus to around 1 percent of GDP (and to 1¾ percent of GDP for the federal government) would put the debt-to-GDP ratio on a downward path. - Interest-growth assumptions: - Current effective interest rate referenced as 2.8 percent. - Projected to reach 3.3 percent by 2027. - Stress-test results and sensitivities: - +200 basis points sovereign risk premium → public debt ≈ 120 percent of GDP by 2027 (about 10 percentage points above baseline). - Real GDP growth shock (one standard deviation below) → public debt +10 percentage points of GDP above baseline by 2027. - 1 percentage point of GDP larger fiscal deficit over the next two years → public debt +5 percentage points of GDP above baseline by 2027. - Combined macro-fiscal shock → public debt up to 130 percent of GDP by 2027. - Mitigating factors: - Depth and liquidity of U.S. Treasury market and reserve currency status of the U.S. dollar mitigate financing risks. ### External Debt Sustainability and Scenario Tests (Appendix IV) - Figure highlights: - Box values shown: Historical: 87; Baseline: 88; CA shock: 91; Combined shock: 92; Real depreciation (30%): 89. - Individual shocks are permanent one-half standard deviation shocks; combined shock is permanent 1/4 standard deviation shocks to real interest rate, growth, and current account balance. - Real depreciation shock: one-time real depreciation of 30 percent occurs in 2020. - Selected numerical excerpts: - External debt (percent of GDP) baseline/historical groups and scenario groups presented in figure tables (sample box numbers and axis labels reproduced in figure notes). ### Market Infrastructure, Repo, and Securities Lending - Triparty repo improvements: intra-day credit extended to collateral providers reduced by over 95 percent due to practice and process changes. - OFR, FRB, and SEC conducted pilot data collections on securities lending; permanent data collection recommended. - February 2019 OFR rules require daily reporting by covered CCPs of centrally cleared repo transactions (about one-quarter of all U.S. repo transactions). - FRBNY collects trade-by-trade tri-party repo data daily from Bank of New York Mellon; FICC reporting to OFR required beginning October 2019. ### Housing Finance - No comprehensive reform to substantially reduce Fannie Mae and Freddie Mac footprint since prior FSAP. - Between 2013 and June 2018, Enterprises transferred portion of credit risk on approximately $2.5 trillion of unpaid principal balance (UPB) with combined Risk in Force (RIF) of about $81 billion. - FHFA issued final rule on uniform mortgage-backed security (UMBS) in February 2019; UMBS planned to begin issuance in June 2019. - Senior Preferred Stock Purchase Agreements (PSPAs) with Treasury provide support; December 21, 2017 FHFA and Treasury reinstated a $3 billion capital reserve amount for each Enterprise. - June 2018 FHFA proposed rule on Enterprise capital requirements; capital requirements remain suspended while Enterprises remain in conservatorship. - March 27, 2019 Presidential Memorandum assigns Secretaries of Treasury and HUD to develop reform plans. ### Data, Governance, and IMF Relations - Membership and IMF accounts: - Membership: Joined December 27, 1945; Article VIII. - Quota: 82,994.20 SDR Million (100.00 percent of Quota). - IMF's Holdings of Currency: 67,520.97 SDR Million (81.33 percent of Quota). - Reserve Tranche Position: 15,499.34 SDR Million (18.68 percent of Quota). - Data dissemination: - United States adheres to Special Data Dissemination Standard Plus; metadata posted on DSBB. - Statements (June 2019): - Staff Representative statement (June 21, 2019) and U.S. Executive Director statement summarized authorities’ views on robust economy, unemployment at 3.6 percent in April and May 2019, and administration growth and fiscal aims. *Source: IMF staff report content supplied in the provided PDF excerpt.* ### 1. Macro-Financial Links Between Household Wealth and Consumption _________________________ 8 ### 1. Macro-Financial Links Between Household Wealth and Consumption _________________________ 8 ### Key findings - Households' consumption responds relatively little to changes in financial wealth; rising housing prices provide support to household consumption, particularly for those at the lower end of the income distribution. - Households raise consumption by around 4-5 cents per year for each US$1 dollar increase in their housing wealth (net of mortgage and home equity loans). - The consumption response to changes in other forms of wealth—including holdings of financial assets—appears to be not statistically different from zero. - A persistent, broad-based 10 percent change in house prices would change aggregate consumption by around 1–1.4 percent. - Working age individuals have a larger consumption response to housing wealth gains than older cohorts; ongoing aging of the U.S. population suggests the aggregate propensity to consume out of housing wealth is likely to fall in coming years. - Low-income households who own their home appear to respond most to increases in housing wealth, consistent with greater cash constraints that are eased when homeowners can extract part of housing wealth to finance consumption. - Households with an outstanding stock of credit increase consumption by more in response to rising home equity than those without credit; this incremental effect is larger for those with lower incomes. ### Methodology and sample - Results draw on an econometric model using household-level survey data. - Panel covers 1999-2017 across a sample of about 8,000 households with time fixed effects and controls for various household-specific characteristics. ### Quantitative estimates (preserved exactly) - MPC out of housing wealth: around 4-5 cents per year for each US$1 dollar increase in housing wealth (net of mortgage and home equity loans). - Aggregate consumption effect of a persistent, broad-based 10 percent change in house prices: around 1–1.4 percent. - Sample size: about 8,000 households. - Panel period: 1999-2017. ### Heterogeneity and dynamics - Age: working age cohorts exhibit larger MPCs from housing wealth than older cohorts. - Income distribution: low-income homeowners have the largest consumption response to increases in housing wealth. - Credit status: homeowners with outstanding credit increase consumption more in response to rising home equity than those without credit; effect is larger for lower-income households. - Demographic trend: the aging U.S. population implies a likely decline in the aggregate propensity to consume out of housing wealth over time. ### Policy implications and interpretation - Housing price increases can materially support household consumption, especially among cash-constrained and lower-income homeowners. - Policies that affect housing wealth distribution and homeowners' ability to extract home equity (for example, through mortgage or home-equity loan markets) can influence consumption dynamics. - The limited consumption response to financial asset wealth suggests that asset-price channels (outside housing) may have muted effects on aggregate consumption relative to housing. *Box 1. "Analyzing the Effects of Financial and Housing Wealth on Consumption Using Micro Data", IMF Working Paper 19/115, 2019 (as cited in the source).* ### Box 2. Financial System Oversight Since the 2018 Article IV ### Box 2. Financial System Oversight Since the 2018 Article IV ### Changes in Oversight - Prudential standards for banks between US$50-100 billion in assets have been lowered, including for liquidity, capital, risk management requirements, and resolution plans. - Bank holding companies with less than US$3 billion in assets will be allowed to incur more debt and are now exempt from minimum capital requirements at the consolidated level. Depository institutions that are part of the holding company will still be subject to minimum capital requirements. - The qualitative assessment in the Comprehensive Capital Analysis and Review process will be phased out. ### Proposed Changes in Oversight - The Federal Reserve has proposed reducing the enhanced supplementary leverage ratio for GSIBs from 6 percent of assets to 3 percent of assets plus a buffer of one-half of the entity’s risk-based capital surcharge. - The Financial Stability Oversight Council has proposed replacing the size-based approach to designation of nonbank financial companies with an activities-based approach, with various changes to the process and criteria for making designation decisions. - The Federal Reserve has proposed sorting domestic banks into four categories based on the size of assets, cross-jurisdictional activity, short-term wholesale funding, nonbank assets, and off-balance sheet exposure. - Category I and II banks (GSIBs and non-GSIBs with more than US$750 billion in assets or with sizable cross-border activity) would see little change to their regulatory requirements. - Category III banks (with US$250-750 billion in assets) would face less restrictive capital and liquidity standards and would conduct company-run stress tests every other year (while remaining subject to annual supervisory stress tests). - Category IV banks (with US$100-250 billion in assets) would be relieved from the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) requirements as well as company-run stress tests. This category of banks would be subject to less frequent supervisory stress tests. - The Federal Reserve is considering a framework for sorting foreign banks into different categories (similar to that for domestic banks) with requirements calibrated to the risks these foreign institutions pose to the U.S. financial system. *International Monetary Fund — Box 2. Financial System Oversight Since the 2018 Article IV* ### 16. Socioeconomic mobility has steadily eroded. Today, American children are considerably ### 16. Socioeconomic mobility has steadily eroded. Today, American children are considerably ### Socioeconomic mobility and geographic mobility - Mean probability that a child earns more than their parents: - Declined from almost 90 percent for those born in the 1940s to 50 percent for the current cohort of young adults (as shown in Chetty and others, 2017). - Geographic mobility: - Only 10 percent of the population moved in 2018. - Geographical Mobility series shown with movers: 1, 2, 3, 4, 7, 10, 13, 16, 19, 22 (1980–2015) and annotated “Number of movers” and “Employment-related (rhs)” (Source: Census, CPS, 1980-2018). - Income and wealth concentration: - Top 1 percent’s share of national income has steadily increased while the bottom 50 percent’s income share has declined (World Inequality Database). - Net wealth is more polarized: the bottom 50 percent of the population has maintained close to zero net wealth throughout the last 50 years (World Inequality Database). ### Education spending, returns, and student debt - Tertiary education spending: - U.S. devotes around 3 percent of GDP to tertiary education (almost twice that of Germany and Japan). - Wage premium and college returns: - A bachelor’s degree garners 60–80 percent more income relative to just having a high school degree. - Recent research indicates this wage premium has been declining for successive cohorts; the lifetime wealth premium from completing college is now close to zero for a large share of the population. - Rising real costs and debt: - Over the past decade, college tuition (net of financial aid) has risen by around 4 percent per year. - Average student debt now totals US$37,172 per recent college graduate. - 2.2 million Americans have student debt in excess of US$100,000. - Completion and attainment: - Only 60 percent of enrollees in four-year colleges graduate within 6 years. - Less than one-half of 25-34 year-olds have an undergraduate degree. ### K-12 education and outcomes - Funding and inequality in PK-12: - Most U.S. states spend less today on K-12 education than they did prior to the financial crisis. - Wide discrepancies in per-student funding across localities and very uneven access to publicly-funded pre-K. - International comparison: - On average, U.S. high school students consistently score below most G-7 countries in internationally comparable math and reading tests. ### Social outcomes and macroeconomic effects - Poverty and human capital: - Those living in poverty face lower labor force participation, higher rates of incarceration, worse education and health outcomes, and lower productivity—particularly pernicious for children growing up below the poverty line. - Healthcare: - High cost of healthcare and lack of universal coverage diminish human capital, reduce working lives, and create important private and public costs weighing on the fiscal position. - Education system effects: - Variable quality, high costs, and unequal public funding of K-12 and college education perpetuate inequalities and erode the supply of productive, skilled labor. - Demand and inequality: - Polarization in wealth and income suppresses aggregate demand (particularly household consumption), reduces social mobility, and worsens inequality of economic opportunities for the young. - Interconnections: - There are two-way feedbacks between social welfare dimensions and macroeconomic outturns. ### Policy recommendations to address social divergences - Providing family-friendly benefits: - Requiring employers to provide paid family leave. - Providing means-tested assistance to families to help defray child and dependent care expenses. - Supporting the poor: - Expanding eligibility for, and increasing the generosity of, the Earned Income Tax Credit (EITC), including more generous treatment for workers without dependents, those under 25, and older workers not yet eligible for social security. - Combine EITC changes with an increase in the federal minimum wage to lessen the risk of a decline in pre-tax wages at the bottom. - Upgrade federal and state social assistance to simplify programs, increase generosity of direct transfer programs, avoid “cliffs” in benefit phase-outs, and better target federal payments to program outcomes. - Box 6 highlights social assistance details: - Social programs currently lift around 45 million Americans out of poverty (Census, 2018). - SNAP, refundable tax credits (notably the EITC and refundable Child Tax Credit), health insurance premium tax credits, and Supplemental Security Income are the main programs alleviating poverty. - Combined direct cost of refundable tax credits and nutrition benefit programs is less than 1 percent of GDP. - Recommendation: smoother phase-out of social assistance programs, extend income eligibility limits, harmonize eligibility thresholds, and consider increasing benefits most incident on the young (SNAP, refundable child tax credit, child care support). - Expanding healthcare coverage and tempering costs: - Protect gains in coverage achieved since the financial crisis for lower income households. - Use pilot programs and new technologies to increase efficiency and pricing transparency by healthcare providers to contain inflation in healthcare services. - Deploy and fund effective state and local programs (including medication assisted treatments) to counter opioid addiction. - Assess scope for antitrust or other solutions where market concentration of health providers or insurers has increased. - Improving education outcomes: - Prioritize spending on early childhood education and universal pre-K. - Design Federal programs to support science, technology, engineering and mathematics programs. - Redesign public school funding to reduce differentials across districts and provide more resources to schools with higher concentrations of low-income students. - Expand apprenticeship and vocational programs as non-college career paths. - Increase focus on college preparation and retention, including financial literacy and advising for college investments. ### Fiscal implications and authorities’ views - Fiscal trade-offs: - Some measures will imply higher fiscal costs that need offsetting by tackling entitlement spending and raising revenues. - Addressing social outcomes is expected to strengthen human capital, increase labor force participation, boost productivity, support aggregate demand, and raise medium-term growth and job creation. - Administration’s views: - Solutions should help low-income households become more self-sufficient by bringing workers into productive employment through strengthened work requirements in welfare programs (including SNAP and Medicaid) and increased means-tested childcare assistance. - The Child Tax Credit expansion in the Tax Cut and Jobs Act has helped support lower income parents and increased their incentive to work. - Greater school choice and allowing public education funding to follow the student could improve K-12 outcomes. - Committed to expanding apprenticeship initiatives and tackling opioid abuse via treatment access, prescription monitoring, and cracking down on illegal drug supplies. *International Monetary Fund — United States chapter content (PDF: 1usaea2019001).* ### 28. The prolonged government shutdown earlier this year demonstrates, once again, the ### 1usaea2019001 - 28. The prolonged government shutdown earlier this year demonstrates, once again, the ### Budgetary process and policy recommendations - The prolonged government shutdown demonstrates dysfunction in the U.S. budgetary process and creates policy-induced uncertainty with negative global spillovers. - Suggested institutional mechanisms to avoid political brinkmanship: - Permanently shift to a budget cycle where annual spending levels are agreed for a two-year period. - Introduce provisions to automatically continue funding government functions, perhaps at reduced levels, if appropriations agreements cannot be met before spending authority expires. - Contemplate new legislative approaches that trigger automatic revenue or spending adjustments in the event that congress-approved fiscal targets are breached. - Replace the existing debt ceiling with a bipartisan agreement on a clear, simple medium-term fiscal objective with explicit numerical goals for both debt and deficit; failing that, design legislation to automatically adjust the debt ceiling once an agreement on appropriations is struck. ### Authorities’ views on fiscal policy and the President’s Budget - The President’s Budget proposes reaching a federal primary surplus of 1.8 percent of GDP by 2029 without increases in federal taxes. - Deficit reduction to be achieved through reprioritization of Federal spending, including: - Administration’s “two-penny” plan: reduces non-defense discretionary funding by two percent per year from 2021 to 2029. - Increases funding for border security, national defense, law enforcement, and programs to tackle the opioid epidemic. - Infrastructure proposal: provide up to US$200 billion in federal funding to incentivize state, local and private providers to invest in up to US$2 trillion in infrastructure projects over the next 10 years. - The Administration supports a clean and prompt increase to the debt ceiling but recognizes such changes require Congressional legislation. - Immigration proposal: increase the share of legal immigrants selected based on skill or merit from the current 12 percent to 57 percent of total legal immigrants. ### Monetary normalization—Fed policy stance and communications - Fed communications shift after December rate increase: median Fed members envisaged 75 basis points increase in the federal funds rate in 2019-20 at the time of the December meeting. - By early January, Chair Powell emphasized being “listening sensitively to the message that markets are sending”, “patient as we watch to see how the economy evolves”, and “prepared to adjust policy quickly and flexibly and to use all of our tools to support the economy”. - January FOMC: removed forward bias for further gradual increases and removed assessment that risks were balanced; March FOMC: most participants envisaged no further policy rate increases in 2019. - Recent inflation dynamics: - Inflation rates declined due to large, downward shifts in specific PCE components. - Core PCE inflation has been persistently below other measures such as trimmed mean or median PCE. - Guidance on policy moves: - Further increases in the policy rate risk triggering abrupt tightening of financial conditions (stronger dollar, lower equity prices, repricing of risk premia) that would damage growth and employment. - Countervailing risk: wage or price inflation could accelerate as capacity constraints tighten, requiring faster future rate increases. - Recommendation: defer further increases until there are greater signs of wage or price inflation than currently evident. - A pause would allow assessment of risks to inflation and employment and could permit positive supply-side effects from continued accommodation. - Staff baseline forecast: - U.S. economy expected to continue growing faster than potential both this year and next. - Policy rate forecast to resume gradual upward path later in 2019 or during 2020. - Both core and headline PCE inflation modestly overshoot 2 percent in 2020. - External spillovers: - Lowering the path for the federal funds rate by 25 basis points increases industrial production for the average country by around 0.2 percent (October 2013 WEO); largest effects historically felt in Latin America and Asia. - Policy adaptation: - Given downside risks to inflation and effective lower bound asymmetries, the path for policy rates should accept some temporary overshooting of the Fed’s inflation goal (approach 2 percent from above). - Pause in rate increases likely required for at least the next few FOMC meetings to achieve overshoot. ### Communication and transparency recommendations for the Fed - Continue data dependence and clear, forward-looking communication to avoid volatility and negative spillovers. - Consider publishing a quarterly monetary policy report that: - Details a central economic scenario endorsed by the FOMC. - Quantifies how FOMC members see the distribution of risks around that scenario. ### Risks to growth and inflation (Box 8) - Risks to inflation: - Well-anchored inflation expectations historically, but output gap has exerted downward pressure; core PCE inflation struggled to rise to the 2 percent target. - Continued downward risks around staff’s forecast of PCE inflation (possible reasons: inflation expectations of price setters below 2 percent or repeated negative relative price changes associated with secular technology changes). - Trade-related risks: - Ongoing trade tensions from the U.S. adversely impact global trade and production via increased policy uncertainty, lower confidence, and tighter financial conditions. - Estimates: investment falls by 1-1¼ percent in response to a one-standard deviation shock to policy uncertainty. - Swift resolution of tensions and approval of U.S.-Mexico-Canada trade agreement could be upside risks. - Policy mix risk: - Current expansionary fiscal policy creates domestic imbalances while the economy operates above potential. - Under current policies, fiscal stimulus expected to reverse in 2020, possibly leading to a sharper-than-expected deceleration over the next two years. - Macro-financial risks: - Nonfinancial corporates have significantly increased indebtedness; lower-rated entities have had open access to debt financing. - Rise in leveraged lending signals weakening lending standards. - Combination of leverage, fragile balance sheets, slowing economy, and potential financial market volatility could create adverse macro-financial feedback loops and amplify downside risks. ### Hysteresis and scope for continued monetary accommodation (Box 9) - Demand-driven labor market expansions can have persistent effects on forecasts and outcomes, suggesting accommodative policy may yield long-run supply-side benefits. - New evidence from a panel of advanced economies over 30 years: - For a 1 percent surprise in current-period employment: - The 5-year ahead forecast for employment rises by 1.7 percent. - Labor force participation forecast increases by 1.3 percent. - Medium-term forecasts appear unbiased relative to realized outcomes, indicating positive hysteresis: positive demand shocks can generate long-lasting supply-side effects (e.g., bringing discouraged workers back, efficiency-enhancing job switches, on-the-job training, investment in physical capital and R&D). ### Balance sheet normalization and operating framework - With the federal funds rate moving above the rate of interest on excess reserves, ending balance sheet normalization by year-end appears warranted. - Challenges: understanding changes in demand for reserves and adjusting supply to align the fed funds rate within target as normalization proceeds. - Barring a significant negative shock, balance sheet adjustments should proceed as outlined in March principles; communicate that balance sheet size decisions are technical and not a change in monetary stance. - Fed review of strategy, tools, and communications: - Decline in estimates of the neutral interest rate increases likelihood of constraint by the effective lower bound in future recessions. - PCE inflation has been below the 2 percent target for much of the past decade; review of alternative strategies is timely. - Operational suggestions: - Consider a standing repo facility to cap spikes in money market rates during temporary higher demand for reserves (e.g., end-month or end-quarter). - Consider moving away from the federal funds rate as the operating target toward a broader measure of overnight borrowing cost. - Consider returning to a point target for the chosen policy rate rather than a target range. ### Authorities’ views on monetary policy posture and operating framework - Monetary policy officials expected the economy to slow but remain in expansion with strong labor market conditions. - Officials believed recent soft inflation was transitory and expected inflation to return to 2 percent as labor markets remained tight. - Officials were attentive to the possibility of low inflation expectations or more labor market slack than usual measures indicate. - Fed intends to continue implementing policy in a regime with an ample supply of reserves where control over short-term rates is exercised primarily through administered rates and active reserve supply management is not required; officials saw little urgency to articulate more medium-term operating framework details. ### Trade policy and international implications - Trade policy uncertainty remains high with negative consequences for U.S. and global activity: - Tariffs remain on steel, aluminum, and certain household appliances. - Tariffs on US$200 billion of imports from China have been increased to 25 percent (with potential for further expansion). - USMCA has not been approved by national legislatures. - USMCA: - If approved, could alleviate uncertainty and modernize rules in services, e-commerce, and data transparency. - Recent elimination of U.S. tariffs on steel and aluminum imports from Canada and Mexico and elimination of their retaliatory tariffs is positive. - USMCA shortcomings include more stringent rules of origin and a provision discouraging members from negotiating free-trade agreements with non-market economies. - A decision on whether to raise tariffs on imported auto vehicles and parts under Section 232 of the 1962 Trade Expansion Act has been deferred for 180 days. *Source: UNITED STATES — INTERNATIONAL MONETARY FUND (excerpt provided).* ### 41. On May 23, the Department of Commerce issued a notice of proposed rulemaking that ### 1usaea2019001 - 41. On May 23, the Department of Commerce issued a notice of proposed rulemaking that ### Trade policy, tariffs, and international spillovers - On May 23, the Department of Commerce issued a notice of proposed rulemaking that would allow the imposition of countervailing duties on countries that are viewed as subsidizing their own exporters by undervaluing their currencies relative to the U.S. dollar. - If adopted, the proposal would raise significant questions of how to judge the degree of such undervaluation and the consistency of the proposal with the U.S. international obligations, including at the WTO. - The proposal could encourage trading partners to respond with retaliatory trade barriers or to regard currency undervaluation as a subsidy, and may have implications for a country’s conduct of monetary policy. - On May 30 the administration invoked the International Emergency Economic Powers Act to impose a 5 percent tariff on all goods imported from Mexico, starting on June 10, unless Mexico takes effective actions to curb illegal immigration across the Southern Border. - Should the U.S. deem Mexico’s actions insufficient, the tariffs would, on the first day of each subsequent month, be progressively raised in 5 percent increments until they reach 25 percent on October 1. - Trade tensions and tariff hikes: - Trade tensions and tariff hikes have had negative outward spillovers, contributing to the deceleration in the global economic expansion in the second half of 2018. - Higher import tariffs imposed by the United States, along with retaliatory measures, have the potential to inflict significant costs on the global economy, particularly if such policy choices feed into confidence and tighten financial conditions. - Policy guidance: - For the global economy to function well, it needs a more open, more stable, and more transparent, rules-based international trade system. - The U.S. and its trading partners should work constructively to address distortions in the trading system that are partly rooted in the system’s inability to adapt to long-term changes in the international environment. - Trade tensions between the U.S. and China should be quickly resolved through a comprehensive agreement that strengthens the international system (not through a managed trade deal that targets a compression in the bilateral U.S.-China trade deficit). - Tariff measures are likely to be ineffective at containing bilateral trade deficits and will be damaging to the U.S. and to global macroeconomic outturns. - The U.S. external imbalance will need to be addressed through fiscal adjustment and supply side reforms that improve productivity and competitiveness. - The U.S. would gain by working with international partners to strengthen the rules-based, multilateral trading system, including advancing negotiations in areas such as e-commerce and services and ensuring the continued enforceability of existing WTO commitments through a well-functioning WTO dispute settlement system. - Social policy complementary measures: - Greater attention to the welfare of workers dislocated by technology and trade is needed, including greater public investments in training and education, temporary income support, and job search assistance. ### Governance, transparency, and AML/CFT weaknesses - FATF Mutual Evaluation Report (2016) findings: - The U.S. is substantially effective at investigating and prosecuting money laundering and cooperating with other jurisdictions over corruption proceeds in the U.S. - Complex legal structures are often used to hide ownership and control of illegal proceeds and the high-end real estate sector may be vulnerable to money laundering abuse. - Since 2010, the Department of Justice’s Kleptocracy Asset Recovery Initiative has restrained US$2.8 billion in assets, and repatriated over US$150 million to countries affected by corruption. - Non-prosecutorial actions since the MER: - December 2017 Executive Order declaring a national emergency with respect to, amongst other things, corruption, providing for the imposition of sanctions which have resulted in 66 corruption-related designations (as of May 16, 2019). - The U.S. Treasury has issued numerous corruption-related advisories to inform financial institutions, governments, and non-governmental organizations. - Identified weaknesses requiring action: - Measures to prevent the abuse of companies are inadequate; lack of readily accessible beneficial ownership information hampers timely investigations and the prevention of legal-entity abuse for money laundering. - The U.S. only complies partially with preventive requirements for regulated firms regarding identification and verification of beneficial ownership for customers and politically exposed persons (PEPs). - In practice, many banks apply requirements regarding PEPs more broadly than obliged, due in large part to supervisory expectations set out by federal banking supervisors. - In 2018, a new requirement for major regulated firms was introduced to obtain beneficial ownership information when corporations (but not other customer types) open new accounts; authorities believe this meets the FATF definition for corporations. - The main regulatory requirement for covered financial institutions is to conduct enhanced due diligence when opening private bank accounts (which must contain more that $1 million) for foreign PEPs. - Major improvements needed to make lawyers, accountants, and trust and company service providers subject to customer due diligence and suspicious transaction reporting obligations. - Action needed to address money laundering risks in high-end real estate: - Real-estate agents are not subject to comprehensive AML/CFT requirements. - Non-bank mortgage lenders and originators have limited awareness of obligations, especially with regard to PEPs. - Geographic Targeting Orders issued by Treasury’s Financial Crimes and Enforcement Network could be used to inform further action. - Authorities’ stance on corruption and beneficial ownership: - Authorities recognized the importance of addressing corruption and welcomed discussions on preventing foreign public officials from concealing proceeds in the U.S. - They emphasized prosecutorial efforts, sanctions designations, and corruption-related advisories. - They acknowledged shortcomings regarding collection of beneficial ownership information at company formation and expressed commitment to work with Congress on potential legislative solutions. ### Authorities’ views on trade with China and USMCA - Administration’s trade stance: - Recognized benefits of international trade and investment, while calling for reforms to address shortcomings of the WTO and other trade rules. - Viewed China as pursuing unfair and discriminatory policies burdening U.S. companies, with key concerns including: - Pressure on U.S. companies to transfer technology. - Weak protection and enforcement of intellectual property rights. - Sponsoring cyber theft and intrusion into commercial networks for commercial purposes. - Tariffs and non-tariff barriers, including subsidy practices that lead to excess global capacity. - Services and agricultural market access. - The U.S. is seeking a more fair, balanced, and reciprocal trading arrangement with China. - One top priority is to obtain Congressional approval of the USMCA, which the administration believes will modernize and rebalance trade with Canada and Mexico, boost economic growth, and create jobs, particularly in manufacturing. - On considering currency undervaluation as a countervailable subsidy: - This evaluation would be one component of a case initiated by the International Trade Administration in the U.S. Department of Commerce to provide relief to U.S. industries from harmful effects of unfairly traded imports. - The U.S. Treasury would be consulted regarding the analysis of undervaluation. ### Staff appraisal: macroeconomic outlook, risks, and policy recommendations - Macroeconomic outlook and labor market: - The U.S. economy is in the longest expansion in recorded history. - Unemployment is at levels not seen since the late 1960s, real wages are rising, and inflationary pressures remain subdued. - Economic activity, while still growing above potential, is expected to slow to around 2.6 percent this year and 1.9 percent in 2020. - Social indicators and distribution: - Despite positive macro outcomes, benefits have not been widely shared. - Average life expectancy is falling; income and wealth polarization have increased; poverty has fallen but remains higher than in other advanced economies; social mobility has steadily eroded; education and health outcomes are discouraging. - Financial stability risks: - Financial system appears healthy but medium-term risks are rising. - More accommodative guidance by global central banks has supported a broad-based increase in asset prices and a compression in the market pricing of volatility. - Vulnerabilities in leveraged corporates and, potentially, in the nonbank system are elevated by historical standards. - Little institutional response has occurred to counter these growing risks. - An abrupt reversal of supportive financial market conditions is a material downside risk with spillovers for other economies. - A sudden tightening of financial conditions could interact with high levels of corporate and public debt, creating feedback loops with negative implications for financial stability and outward spillovers for non-U.S. corporates, sovereigns and financial institutions, particularly those with significant leverage or rollover needs in U.S. dollars. - Fiscal sustainability: - The U.S. public debt is on an unsustainable path. - Policy adjustments are needed to lower the fiscal deficit and put the public debt on a gradual downward path over the medium-term. - Successful packages will likely require steps to address expected increases in entitlement spending on health and social security, to raise indirect taxes, and to institute a federal carbon tax. - Monetary policy recommendations: - Further increases in the federal funds rate should be deferred until there are greater signs of wage or price inflation than are currently evident. - Given falling inflation, anchored inflation expectations, a flat trade-off between inflation and slack, and uncertainties around the U.S. and global outlook, monetary policy has appropriately paused. - Providing greater clarity and a more holistic picture of the expected evolution of the operating framework for monetary policy would be valuable. - Operational changes could involve introducing a standing repo facility; moving away from the federal funds rate as the operating target; and returning to a point target for the policy rate (rather than the current target range). - External sector assessment: - The external position is judged to be moderately weaker than implied by medium-term fundamentals and desirable policies. - The current account deficit is expected to rise modestly over the medium-term, moving it further away from the estimated current account norm. - The real effective exchange rate remains somewhat overvalued. - Tariff measures are likely to be ineffective at containing bilateral trade deficits and will be damaging to the U.S. and to global macroeconomic outturns. - The U.S. external imbalance will need to be addressed through fiscal adjustment and supply side reforms that improve productivity and competitiveness. - AML/CFT recommendations (summary): - Ensure law enforcement agencies have timely access to beneficial ownership information to speed investigations and prevent abuse of legal entities for money laundering. - Strengthen requirements for regulated firms regarding identification and verification of beneficial ownership for customers and PEPs. - Make lawyers, accountants, and trust and company service providers subject to customer due diligence and suspicious transaction reporting obligations. - Address money laundering risks in high-end real estate, including expanding AML/CFT obligations for real-estate agents and improving awareness among non-bank mortgage lenders and originators, especially regarding PEPs. *International Monetary Fund — United States staff report excerpt* ### 62. It is recommended that the next Article IV consultation take place on the standard 12- ### 1usaea2019001 - 62. It is recommended that the next Article IV consultation take place on the standard 12- ### Recommendation - It is recommended that the next Article IV consultation take place on the standard 12-month cycle. ### Key macroeconomic projections and indicators (selected) - Real GDP: 2.9 (2018); 2.6 (2019); 1.9 (2020); 1.8 (2021); 1.7 (2022); 1.6 (2023); 1.6 (2024). - Real GDP (q4/q4): 3.0 (2018); 2.3 (2019); 1.9 (2020); 1.7 (2021); 1.7 (2022); 1.6 (2023); 1.6 (2024). - Net exports (contribution to real GDP growth): -0.2 (2018); 0.2 (2019); -0.2 (2020); -0.2 (2021); 0.0 (2022); 0.0 (2023); 0.0 (2024). - Total domestic demand: 3.0 (2018); 2.4 (2019); 2.0 (2020); 1.9 (2021); 1.6 (2022); 1.5 (2023); 1.5 (2024). - Private final consumption: 2.6 (2018); 2.3 (2019); 2.2 (2020); 1.9 (2021); 1.8 (2022); 1.6 (2023); 1.6 (2024). - Gross fixed domestic investment: 4.8 (2018); 2.7 (2019); 2.4 (2020); 2.4 (2021); 1.5 (2022); 1.7 (2023); 1.8 (2024). - Nominal GDP: 5.2 (2018); 4.3 (2019); 4.0 (2020); 3.8 (2021); 3.7 (2022); 3.6 (2023); 3.7 (2024). - Personal saving rate (% of disposable income): 6.8 (2018); 6.5 (2019); 6.4 (2020); 6.3 (2021); 6.2 (2022); 6.2 (2023); 6.2 (2024). - Unemployment rate: 3.9 (2018); 3.6 (2019); 3.5 (2020); 3.6 (2021); 3.7 (2022); 3.8 (2023); 3.8 (2024). - CPI inflation (q4/q4): 2.2 (2018); 2.4 (2019); 2.6 (2020); 2.3 (2021); 2.2 (2022); 2.2 (2023); 2.2 (2024). - Core PCE Inflation (q4/q4): 1.9 (2018); 1.8 (2019); 2.1 (2020); 2.1 (2021); 2.0 (2022); 2.0 (2023); 2.0 (2024). ### Government finances and fiscal projections - Federal balance (% of GDP): -3.9 (2018); -4.2 (2019); -4.0 (2020); -4.0 (2021); -4.3 (2022); -4.1 (2023); -3.8 (2024). - Federal debt held by the public (% of GDP): 77.8 (2018); 78.7 (2019); 79.6 (2020); 80.6 (2021); 82.0 (2022); 83.3 (2023); 84.2 (2024). - General government budget balance (% of GDP): -5.3 (2018); -4.9 (2019); -4.6 (2020); -4.6 (2021); -4.9 (2022); -4.5 (2023); -4.2 (2024). - General government gross debt (% of GDP): 106.8 (2018); 107.9 (2019); 108.8 (2020); 109.9 (2021); 111.3 (2022); 112.4 (2023); 113.2 (2024). ### Balance of payments (selected) - Current account balance (% of GDP): -2.3 (2018); -2.1 (2019); -2.5 (2020); -2.7 (2021); -2.6 (2022); -2.5 (2023); -2.4 (2024). - Merchandise trade balance (% of GDP): -4.3 (2018); -4.2 (2019); -4.5 (2020); -4.6 (2021); -4.6 (2022); -4.6 (2023); -4.5 (2024). - Export volume (NIPA basis, goods): 4.7 (2018); 3.5 (2019); 3.1 (2020); 3.9 (2021); 4.7 (2022); 4.3 (2023); 4.4 (2024). - Import volume (NIPA basis, goods): 4.8 (2018); 1.9 (2019); 4.1 (2020); 3.9 (2021); 3.2 (2022); 3.2 (2023); 3.1 (2024). - Net international investment position (% of GDP): -47.4 (2018); -47.5 (2019); -48.2 (2020); -49.1 (2021); -50.0 (2022); -50.7 (2023); -51.4 (2024). ### External sector assessment (summary) - Overall assessment: The US external position was moderately weaker than implied by medium-term fundamentals and desirable policies in 2018. - CA assessment: - Actual CA: -2.3 (2018). - Cyclically adjusted CA: -2.0 (2018). - EBA CA Norm: -1.0 (2018). - Staff CA gap: -1.2 (Staff Adj. -0.2 included). - Staff assesses the 2018 cyclically adjusted CA to be -0.7 to -1.7 percent of GDP lower than the level implied by fundamentals and desirable policies. - REER assessment: - REER appreciation: about 4 percent in 2018 (eop) after a 7 percent depreciation in 2017 (eop). - Through February 2019, USD appreciated 1.6 percent in real terms relative to the 2018 average. - Staff assesses the 2018 average REER to be somewhat overvalued, in the 6-12 percent range. - NIIP trajectory: - NIIP (before valuation effects): decreased from -39.6 percent of GDP in 2017 to -43.4 percent of GDP in 2018 (background note). - Staff’s baseline projects the negative NIIP to expand by 4 percent of GDP over the next five years. - NIIP components (2018): NIIP -44.4; Gross Assets 133.4; Debt Assets 38.3; Gross Liab. 177.7; Debt Liab. 85.0. ### Financial soundness indicators (selected) - Regulatory capital to risk-weighted assets: 14.7 (2018Q3). - Non-performing loans to total gross loans: 0.9 (2018Q3). - Return on assets: 0.4 (2018Q3). - Return on equity: 3.7 (2018Q3). - Liquid assets to total assets (liquid asset ratio): 12.9 (2018Q3). ### Fiscal assessment and recommended policy responses - IMF staff recommendation: Fiscal consolidation aiming at a medium-term general government primary surplus of about 1 percent of GDP (a federal government primary surplus of about 1¾ percent of GDP) to put the debt-GDP ratio on a downward path and address external imbalances. - Structural policy recommendations to increase competitiveness while maintaining full employment: - Upgrading infrastructure. - Enhancing schooling, training and mobility of workers. - Encouraging labor force participation. - Rolling back recently-imposed tariff barriers and resolving trade and investment disagreements without resorting to tariff and nontariff barriers. ### Risk Assessment Matrix — selected risks and implied impacts - Rising protectionism and retreat from multilateralism: Overall Level of Concern: High; Medium-term Likelihood of Realization: Medium; Expected Impact: Escalating trade actions could reduce growth, increase financial market volatility, and undermine global cooperation. - Weaker-than-expected growth in the U.S.: Overall Level of Concern: Medium; Likelihood: High; Expected Impact: Policy-induced recession risk from fiscal contraction and withdrawal of tax stimulus. - Tightening in financial conditions / asset price volatility: Overall Level of Concern: Low; Likelihood: Medium; Expected Impact: 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; current account deficit would widen by around 1 percent of GDP. A 10 percent sustained fall in house prices is estimated to reduce private consumption by about 1-1.5 percent. - Weaker-than-expected growth in Europe: Overall Level of Concern: High; Likelihood: Low; Expected Impact: 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. - Cyber-attacks: Overall Level of Concern: Medium; Likelihood: High; Expected Impact: Potential to trigger systemic financial instability or wide socio-economic disruption. *Sources: BEA; BLS; FRB; Haver Analytics; and IMF staff estimates.* ### Appendix III. Public Debt Sustainability Analysis ### Appendix III. Public Debt Sustainability Analysis ### Overview and background - The U.S. budget deficit started rising in 2016, following a decline during 2010-15. - The U.S. public debt-to-GDP ratio is characterized in the text as "on an unsustainable path." - Fiscal measures: - Significant fiscal consolidation legislated in 2011–13 to address high public debt (which had doubled at the federal government level since 2007). - The Bipartisan Budget Acts of 2013, 2015, and 2018 reversed some cuts scheduled since FY2014, with only partial offsets from later mandatory spending cuts. - The Tax Act of 2015 and the Tax Cuts and Jobs Act of 2017 extended several tax cuts and introduced new ones. - Consequence: sustained fiscal deficits are projected for the medium to long term. ### Baseline projections (current laws) - Federal debt held by the public: - Projected to increase from about 76 percent of GDP in 2018 to around 87 percent of GDP in 2028. - General government gross debt: - Projected to rise from about 106 percent of GDP to 111 percent of GDP between 2018 and 2028. - Public gross financing needs described as "large, albeit manageable given the global reserve currency status of the U.S. dollar." - Fiscal projections assume age-related spending pressures on entitlement programs and normalization of interest rates. ### Adjustment scenario and policy implications - Observed 2018 general government primary deficit: 2.6 percent of GDP. - Staff view: gradually raising the primary general government surplus to around 1 percent of GDP (and to 1¾ percent of GDP for the federal government) would put the debt-to-GDP ratio firmly on a downward path over the medium term. - Note: "The target primary surplus would have to be larger to bring the debt ratio closer to pre-crisis levels by 2030." - Recommended features of a credible medium-term fiscal adjustment: - Reprioritization of budget programs. - Revenue-gaining tax reform. ### Debt servicing costs and interest-growth dynamics - Current favorable interest rate-growth differential benefits fiscal projections. - Current effective interest rate: 2.8 percent (current level referenced in text). - Projected effective interest rate under staff baseline: - Gradually rise from 2.8 percent to reach 3.3 percent by 2027. - The text notes 3.3 percent by 2027 is "somewhat above its 2008–16 average level." - Implication: real interest rates will become a substantial debt-creating flow over the medium term. ### Realism of assumptions - Baseline economic assumptions and fiscal projections are "generally within the error band observed for all countries." - The projected modest fiscal adjustment is characterized as realistic—"well within the median range of consolidation episodes observed across countries in 1990–2011." ### Stress tests and vulnerability analysis - Public debt dynamics are highly sensitive to growth and interest rate assumptions, reflecting that U.S. public debt ratio already exceeds 100 percent of GDP (general government). - Specific stress outcomes: - An increase of 200 basis points in the sovereign risk premium would raise the public debt ratio to about 120 percent of GDP by 2027, about 10 percentage points of GDP above the baseline. - A real GDP growth shock one standard deviation below the baseline would increase the public debt ratio 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 the public debt ratio by about 5 percentage points above the baseline by 2027. - A combined macro-fiscal shock could raise the public debt ratio to as high as 130 percent of GDP by 2027. - Exchange rate shock: no implications for debt sustainability given all debt is denominated in local currency and the reserve currency status of the dollar. - Additional stress-test inputs shown in figures: - Bond Spread over German Bonds: e.g., "251 bp" appears in the figure summary. - Public gross financing needs benchmarks and percentiles are reported in figures (see figure notes). ### Mitigating factors and market considerations - Mitigating factors: - Depth and liquidity of the U.S. Treasury market. - Safe-haven and reserve currency status of the U.S. dollar. - These factors mitigate risks associated with high external and gross financing requirements. ### Key statistics and figure-derived numbers (as reported) - Federal debt held by the public: about 76 percent of GDP in 2018; around 87 percent of GDP in 2028. - General government gross debt: about 106 percent of GDP in 2018; 111 percent of GDP in 2028. - 2018 general government primary deficit: 2.6 percent of GDP. - Target primary general government surplus (staff view): around 1 percent of GDP. - Target primary federal government surplus (staff view): 1¾ percent of GDP. - Effective interest rates: - Current level referenced as 2.8 percent. - Projected to reach 3.3 percent by 2027. - Example stress-test outcomes: - +200 basis points sovereign premium → public debt ≈ 120 percent of GDP by 2027. - Growth shock (one standard deviation below) → +10 percentage points of GDP above baseline by 2027. - 1 percentage point of GDP larger deficit over two years → +5 percentage points of GDP above baseline by 2027. - Combined macro-fiscal shock → public debt up to 130 percent of GDP by 2027. - Public DSA baseline table highlights (selected): - Nominal gross public debt: 2018 = 106.2 (percent of GDP reported in table as 106.2 for 2017 and 105.8 for 2018 in different rows; overall narrative uses "about 106 percent of GDP"). - Public gross financing needs (percent of GDP): values in the Baseline scenario table include 39.1, 36.2, 38.1, 32.1, 32.8, 32.9, 32.4, 33.5, 32.7, 33.3, 32.8, 33.3, 33.7 (series shown in the figure table). - Real GDP growth (percent) projection sample: 2019 onward = 1.9, 1.8, 1.7, 1.6, 1.6, 1.7, 1.7, 1.7, 1.7 (various tables and scenarios). - Inflation (GDP deflator, percent) projection sample: around 2.0 percent in many projection years. - Debt-stabilizing primary balance in baseline table: -0.6 (percent of GDP) reported as "Debt-stabilizing primary balance 9/ -0.6" in the Baseline Scenario table. - External DSA snapshot (figure data): - Baseline external debt: 2018 = 93.7 (percent of GDP); projected 2019 = 92.5; 2024 = 87.9. - Change in external debt: 2018 to 2019 examples include -3.3 and -1.1 as shown in the External DSA figure table. - Gross external financing need: e.g., in dollars and as percent of GDP series appear in the External DSA figure (sample values include $17,351.0, $17,912.7, $18,137.4, $19,079.0, $19,386.1, $20,213.6, etc., and percent of GDP near 99.0, 98.3, 97.0, 97.9, 94.6, ... in table). - External debt-to-exports ratio examples: 2014 = 722.6, 2015 = 760.3, 2016 = 799.1, 2017 = 803.7, 2018 = 764.4 (percent). *Source: IMF staff* ### Appendix IV. Figure 2. External Debt Sustainability: Bound Tests ### Appendix IV. Figure 2. External Debt Sustainability: Bound Tests ### Figure highlights and key statistics - External debt plotted as percent of GDP under baseline and multiple shock scenarios. - Boxed average projections and historical ten-year averages shown for variables in baseline and scenarios. - Box values (as shown in figure): - Historical: 87 - Baseline: 88 - CA shock: 91 - Combined shock: 92 - Real depreciation (30% depreciation scenario): 89 - Interest-rate shock label in figure: "i-rate shock" - Gross financing need under baseline is indicated (right scale). - Axis and tick labels appearing in the figure include: 20, 30, 40, 50, 60, 70, 80, 90, 100 and years 2014 2016 2018 2020 2022 2024. ### Notes on scenarios, shocks, and methodology - Sources: International Monetary Fund, Country desk data, and staff estimates. - Shaded areas represent actual data. - Individual shocks are permanent one-half standard deviation shocks. - Ten-year historical average for the variable is shown; for historical scenarios, historical averages are calculated over the ten-year period and used to project debt dynamics five years ahead. - Combined shock described as: Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance. - Real depreciation shock described as: One-time real depreciation of 30 percent occurs in 2020. - Non-interest current account shock is shown in the figure (in percent of GDP). - Growth shock is shown in the figure (in percent per year). ### Numerical scenario summaries (baseline, scenario, historical) - First group: - Baseline: 2.4 - Scenario: 2.9 - Historical: 0.9 - Second group: - Baseline: 1.7 - Scenario: 0.9 - Historical: 1.8 - Third group: - Baseline: -0.4 - Scenario: -0.9 - Historical: -1.5 ### FSAP Recommendation Developments — Macroprudential framework and policy - 1 Provide an explicit financial stability mandate to all FSOC member agencies - Several agencies continue to have no explicit legal mandate to support financial stability. - Lack of explicit mandates can complicate input to the Financial Stability Oversight Council (FSOC) and potentially undermine responses and macroprudential coordination. - Not all FSOC agencies within existing authorities have an explicit legal mandate to support financial stability, though they continue to make progress toward financial reforms. - Some FSOC agencies, including the U.S. federal banking agencies, have responsibilities that include key roles in maintaining financial stability. - FSOC issued proposed interpretive guidance to prioritize identifying, assessing, and addressing potential risks and threats to U.S. financial stability through an activities-based approach with two priorities: - (1) Identify and address, in consultation with relevant financial regulatory agencies, potential risks and emerging threats on a system-wide basis to reduce potential competitive distortions from entity-specific regulation and supervision. - (2) Allow relevant financial regulatory agencies, which generally possess greater information and expertise on company, product, and market risks, to address potential risks rather than subjecting companies to new regulatory authorities. - 2 Include in FSOC Annual Report specific follow-up actions for each material threat identified - FSOC’s Annual Reports discuss each material threat in detail, provide updates on regulations and other measures proposed or implemented in response to each threat, and outline research agendas and policy recommendations if needed. - Specific timelines and responsible agencies are not identified in the reports. - 3 Publish the current U.S. macroprudential toolkit and prioritize further development - FSAP recommended FSOC identify when macroprudential tools are needed and promote implementation of effective system-wide and time-varying macroprudential tools. - The macroprudential toolkit has not been centrally published; prioritization remains to be made. - Recommended further development and implementation of time-varying tools like the countercyclical capital buffer (CCyB): - 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 assessment. - Macroprudential tools could be used in the real estate sector (e.g., by varying maximum loan-to-value and debt-to-income ratios). - OCC, FDIC, and Federal Reserve (FRB) have authority under their regulations to determine whether to activate the CCyB and its appropriate level for banking organizations in their jurisdictions. - Staff from the three agencies meet regularly to discuss CCyB implementation and have generally agreed to coordinate as appropriate. - In September 2016, the FRB approved a final policy statement detailing the framework for setting the CCyB; the FRB re-assesses the CCyB level annually and has begun issuing a semiannual report on financial stability conditions. - Most recently, in March 2019, the FRB affirmed the amount of the CCyB at 0 percent. - The NAIC Financial Stability (EX) Task Force is working to enhance the macroprudential toolkit of state insurance regulators through the Macro Prudential Initiative (MPI), which addresses four focus areas: - Developing a liquidity stress testing framework for material life insurance groups, including enhancing disclosures to better assess products with higher liquidity risk potential. - Capital stress testing to be addressed as part of the NAIC group capital calculation. - Reviewing existing recovery and resolution processes and disclosures to identify any enhancement needs. - Determining if there are material gaps in existing counterparty exposure disclosures. - 4 Expedite heightened prudential standards for designated non-bank systemically important financial institutions (SIFIs) - In 2015, the FRB adopted enhanced prudential standards (EPS) for General Electric Capital Corporation, Inc. (GECC) following its July 2013 FSOC designation; EPS included capital and liquidity requirements, capital planning and stress testing, risk management requirements, and restrictions on intercompany transactions. - FSOC rescinded designations of GECC (June 2016), AIG (September 2017), and Prudential Financial, Inc. (October 2018). - In March 2016, a federal district court rescinded FSOC’s designation of MetLife, Inc. - As a result, there are currently no companies designated by FSOC for Federal Reserve supervision and enhanced prudential standards. - 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. - In parallel, the FRB approved a notice of proposed rulemaking to apply EPS for systemically important insurance companies as designated by FSOC; these proposed standards would apply consistent liquidity, corporate governance, and risk management standards and require the firms to employ both a chief risk officer and chief actuary. - 5 Improve data collection, and address impediments to inter-agency data sharing - The Office of Financial Research (OFR) Interagency Data Inventory (IDI) catalogs data that FSOC member agencies purchase or collect from the industry or derive from other data; the IDI had its annual update in March 2017. - FSOC member agencies use the inventory to identify data gaps and improve research and analysis, but specific restrictions to data sharing mean that listing in the inventory does not necessarily signify that all FSOC member agencies have access to all data sets. - OFR facilitated a review of data sharing agreements to identify areas for standardization (see OFR 2016 Financial Stability Report). - OFR, along with the FRB, Federal Reserve Bank of New York (FRBNY), and the Securities and Exchange Commission (SEC) completed pilot data collections about bilateral repurchase agreements (repos) and securities lending activity; OFR has made the summary of findings publicly available on its website. - Steady progress in data collection and sharing is being made, but more work remains: - (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. *Sources: International Monetary Fund, Country desk data, and staff estimates.* ### Section 21(c)(7) of the Commodity Exchange Act directs swap data repositories to make swap data available to ### 1usaea2019001 - Section 21(c)(7) of the Commodity Exchange Act directs swap data repositories to make swap data available to ### Swap data access rules and CFTC amendments - Section 21(c)(7) of the Commodity Exchange Act 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 June 2018, the CFTC amended the 2011 access requirements such that certain authorities may obtain swap data access more efficiently. - The amendments removed statutorily-mandated requirements that foreign and domestic regulators indemnify swap data repositories for any expenses arising from litigation relating to the information provided by the repositories. - The amendments also set forth a process for the CFTC to deem other domestic and foreign regulators appropriate to receive access to swap data held by the repositories. ### SEC rules on security-based swap data repositories - In August 2016, the SEC adopted rules to provide authorities with conditional access to security-based swap data held by SEC-registered security-based swap data repositories. - Authorities must agree to keep confidential the data they receive from the repository. - The rules require a memorandum of understanding or other arrangement between the SEC and the data recipient addressing the confidentiality of the information made available. ### Federal banking agencies: supervisory objectives and coordination - Safety and soundness remains a core supervisory objective of the federal banking agencies and is required to be considered in supervisory contexts including reviewing and approving applications; the frequency of examining supervised institutions; ordering institutions to cease and desist; imposing civil money penalties; promulgating regulations; and restricting the payment of dividends, extensions of credit to related parties, employee compensation, and operations of subsidiaries. - The multi-agency statutory framework requires coordination to avoid duplication of supervision. The Federal Financial Institutions Examination Council (FFIEC) is used to promote consistent approaches to bank supervision. - Banks are examined for safety and soundness under the Uniform Financial Institutions Rating System. - The Federal Reserve examines bank holding companies and savings and loan holding companies under: - its new large financial institution rating system finalized in 2018, and - its RFI/C(D) rating system now used to rate smaller holding companies. ### Concentration risk and single-counterparty credit limits - Regulation XX (final rule issued November 2014) implements Section 622 of the DFA and establishes a financial sector concentration limit: - Regulation XX prohibits a financial company from merging or consolidating with, or acquiring control of, another company if the resulting company’s liabilities would exceed 10 percent of the aggregate consolidated liabilities of all financial companies. - August 2018 Federal Reserve final rule on single-counterparty credit risk applies to: - bank holding companies (BHCs) and foreign banking organizations with total consolidated assets of $250 billion or more, - any U.S. intermediate holding company (U.S. IHCs) of a foreign banking organization with $50 billion or more in total consolidated assets, - any BHC identified as a global systemically important BHC under the Federal Reserve’s capital rules. - Under the final rule: - GSIBs are 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 any other counterparty; - non-GSIB BHCs with $250 billion or more in total consolidated assets are restricted to a credit exposure of no more than 25 percent of the firm’s tier 1 capital to another counterparty; - U.S. IHCs that have total consolidated assets of at least $50 billion but less than $250 billion are restricted to a credit exposure to a counterparty which cannot exceed 25 percent of the IHC’s total regulatory capital plus the balance of its allowance for loan and lease losses; - U.S. IHCs that have total consolidated assets of $250 billion or more but are not major U.S. IHCs are restricted to a credit exposure to a counterparty which cannot exceed 25 percent of the IHC’s tier 1 capital; - U.S. IHCs that have total consolidated assets of $500 billion or more are restricted to a credit exposure to a major counterparty which cannot exceed 15 percent of the IHC’s tier 1 capital, and up to 25 percent of the firm’s tier 1 capital to any other counterparty. - Comparable supervisory guidance on other risk concentrations has not yet been issued. - Separate and additional limits for money market investments and security holdings available to banks (but not federal savings associations) remain. ### Guidance on operational risk, interest rate risk, and related-party lending - Agencies participated in the development of the Standardized Approach under the Basel III reforms and are considering revising U.S. capital rules to move away from the Advanced Measurement Approach (AMA). - New guidance related to operational risk has been issued by the agencies. - Approach to interest rate risk (IRR) in the banking book: - Does not include specific capital charges or limits being set under Pillar 2. - Consistent with the IRR standard issued by Basel in April 2016, U.S. guidance requires proper oversight of models and analysis of risk under a variety of scenarios. Data is collected at the regulatory level during examinations. - Limits and requirements on related party lending remain in section 22(h) of the Federal Reserve Act and existing regulatory framework (e.g., Regulation O and W). ### Insurance sector supervision, valuation, and group-level measures - The supervisory and regulatory architecture for insurance firms has not changed. - Valuation and principle-based reserving (PBR): - All states have adopted the Valuation Manual and life principle-based reserving (PBR). - Life PBR is optional during a 3-year transition period, and becomes mandatory in 2020. - A total of 37 companies have now implemented PBR, and must file a PBR Actuarial Report annually providing details on their PBR reserves, including asset and liability assumptions and valuation methodology. - The Valuation Analysis Working Group (VAWG) reviewed all of the 2017 reports and recommended clarifying amendments to the Valuation Manual; these amendments are being processed for the 2020 Valuation Manual. - Group supervision and group-level capital: - In April 2016, the FRB approved proposed consolidated financial reporting requirements for systemically important insurance companies designated by the FSOC. - In June 2016, the FRB approved an advance notice of proposed rulemaking (ANPR) on conceptual frameworks for capital standards for systemically important insurance companies and insurance companies that own a bank or thrift. - In June 2016, the FRB approved a notice of proposed rulemaking to apply enhanced prudential standards for insurance companies designated by the FSOC, including consistent liquidity, corporate governance, and risk management standards and requirements for a chief risk officer and chief actuary. - State insurance regulators, through the NAIC, are developing a group capital calculation as an additional analysis tool (not a quantitative capital requirement); the proposed group capital calculation is currently being tested by over 30 insurance groups and 15 lead states, expected to be completed by early October. - As of June 2017: - all 50 states, the District of Columbia and Puerto Rico, have adopted the updated NAIC model holding company act and the NAIC Own Risk and Solvency Assessment (ORSA) model Act; - additional updates relating to powers of a group-wide supervisor (GWS) of an IAIG have been adopted in 29 states and will be required to be adopted in all accredited U.S. states and jurisdictions by January 1, 2020; - 27 states have adopted the NAIC corporate governance model act, which will be required to be adopted in all accredited U.S. states and jurisdictions by January 1, 2020. ### SEC and CFTC resources, and asset manager examinations - Information on SEC/CFTC funding for Fiscal Year 2019 is available (reference provided in original text). - FSAP recommendation: the SEC needs to be better equipped to significantly increase asset manager examinations from the current coverage of around 10 percent of investment advisers per year. - SEC examination coverage trends: - SEC staff examined 11% of investment advisers in fiscal year 2016; - 15% of investment advisers in fiscal year 2017; - 17% of investment advisers in fiscal year 2018 while the number of registered investment advisers increased by approximately 5% from the previous fiscal year. ### Asset managers, liquidity programs, and SEC rules - FSOC continues to monitor potential risks to financial stability stemming from the asset management industry and has recommended that the SEC continue to monitor the sector. - The SEC adopted rules in October 2016 requiring open-end funds to have liquidity risk management programs with certain required elements. Certain aspects of the SEC’s liquidity risk management rule were revised in 2018. ### Stress testing: solvency, liquidity, and network analysis - CCAR and DFA stress tests: - Continue as supervisory solvency stress tests in which second-round effects are not explicitly incorporated but are implicitly captured through: - macro scenarios based on very severe recessions coupled with significant declines in asset prices; - a global market shock based on movements in the second half of 2008; - an instruction to participating banks to compute outcomes if the counterparty whose default would cause the largest losses was to default. - Liquidity standards and proposals: - Federal banking agencies finalized a rule implementing the Liquidity Coverage Ratio (LCR) in 2014 and proposed a Net Stable Funding Ratio (NSFR) in 2016. - By definition, the LCR is a short-term liquidity stress test; the proposed NSFR would measure stability of funding over a one year timeframe. - Liquidity stress testing for nonbanks: - Authorities do not conduct, on a regular basis, liquidity stress tests on nonbanks. - The SEC requires money market mutual funds (MMMFs) to conduct regular stress tests, including on their liquidity. - Certain of the largest broker-dealers provide additional liquidity information to SEC staff. - The SEC’s October 2016 rules require open-end funds to have liquidity risk management programs with certain required elements. - Insurance sector liquidity stress testing: - Most large U.S. life insurers perform internal liquidity stress testing. - A consistent regulatory liquidity stress test is under development by the NAIC. - The requirement will apply where a group or legal entity with U.S. results triggers any of six thresholds (fixed and indexed annuities, funding agreements and GICs, derivatives, securities lending, repurchase agreements, and borrowed money). - Once triggered, the liquidity stress test will be based upon internal company cash flows, utilize consistent stress tests and “what if” modifications (currently being established), be applied at the legal entity level (including the holding company) with results reported individually and as a group. - The target date for the proposed liquidity stress testing design is August 2019. - Network analysis and integration: - The DFA stress tests and the CCAR do not integrate different risk classes beyond credit and market risk and assess banks individually; contagion and spillover risks enter implicitly through macro dynamics rather than explicitly. - OFR has conducted research on network models within the context of stress testing and contagion. - Foundational liquidity guidance: - In March 2010, the U.S. federal banking agencies issued “The Interagency Policy Statement on Funding and Liquidity Risk Management” (75 FR 13656 (March 22, 2010)) (“Liquidity Risk Policy Statement”), incorporating elements of the Basel Liquidity Principles and emphasizing corporate governance, cash-flow projections, stress testing, ample liquidity resources, and formal contingency funding plans. - In 2014, the Federal Reserve adopted Regulation YY (12 CFR part 252) to implement enhanced prudential standards established under the DFA. *Italic: Source: 1usaea2019001 - Section 21(c)(7) of the Commodity Exchange Act directs swap data repositories to make swap data available to* ### section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) (12 U.S.C. § ### 1usaea2019001 - section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) (12 U.S.C. § ### Regulation YY and liquidity stress testing - Regulation YY liquidity requirements apply to BHCs, including foreign-based BHCs, with total consolidated assets of $50 billion or more (covered companies). - Requirements: establish and maintain robust liquidity risk management practices; perform internal stress tests to determine adequacy of liquidity resources; maintain a buffer of highly liquid assets to cover cash flow needs over a 30-day stress period (or the first 14 days of a 30-day stress period for collective U.S. branches and agencies of a foreign banking organization operating in the United States). - Proposed statutory changes: Board proposed to change threshold for Regulation YY to apply to bank holding companies with total assets of $100 billion or more; for foreign banking organizations, proposed to raise threshold to $100 billion or more in combined U.S. assets. - Supervisory approach: - A component of Regulation YY’s liquidity stress testing requirement is evaluated annually (e.g., one year review of foreign banking organizations’ stress testing of U.S. branches/agencies; following year review of bank holding companies). - Federal Reserve conducts an annual review of liquidity stress testing practices, liquidity position, and liquidity risk management of systemically important banking organizations. - Supervisory review assesses adequacy of firms' liquidity positions relative to unique risks and tests reliability of firms' approaches, using supervisory liquidity metrics and analysis of firms' internal stress tests. ### Insurance sector: consolidated group-level stress testing (ORSA) - State insurance regulators assess consolidated group-level stress tests via the Own Risk and Solvency Assessment (ORSA) under the Risk Management and Own Risk Assessment Model Act, adopted by all states. - Group capital calculation contemplates determining if stress testing should be included in the filing of that calculation. ### Asset management sector: liquidity stress testing and reporting - FSOC monitors potential financial stability risks from asset management industry. - SEC proposals (2015) addressed: - Enhanced data reporting for registered investment companies and investment advisers regarding separately managed account business. - Strengthening open-end funds’ liquidity risk management and disclosure. - Limits to leverage obtained through derivatives by registered investment companies. - FSOC recommendations (2017, 2018): monitor implementation of SEC rules; improve metrics and analytical tools; continue regulator-industry collaboration on reporting standards. - SEC requirements for MMMFs: - MMMFs must conduct regular stress tests on liquidity. - MMMFs required to periodically test ability to maintain weekly liquid assets of at least 10% and to minimize principal volatility under specified hypothetical events, including (i) increases in short-term interest rates; (ii) downgrade or default of particular portfolio security positions; (iii) widening of spreads in various sectors combined with shareholder redemptions. - Open-end funds requirements: - Assess, manage, and periodically review liquidity risk at least annually based on factors including investment strategy, portfolio liquidity under normal and stressed conditions, short-term and long-term cash flow projections, holdings of cash and cash equivalents, and borrowing arrangements. - ETFs must also consider relationship between portfolio liquidity and how ETF shares trade, efficiency of arbitrage function and active participation by market participants, and composition of baskets. - Requirement is principles-based; funds may tailor procedures to their circumstances. - Form N-PORT (2016): requires quarterly reporting of complete portfolio holdings and additional information, including flow information (total net asset value of shares sold, redeemed or repurchased). - Form N-LIQUID and other reporting increase SEC staff ability to monitor operational information and identify funds susceptible to runs. ### Money market mutual funds (MMMFs) and NAV reforms - SEC adopted rules require floating NAVs for institutional prime MMMFs; retail and government MMMFs may continue amortized cost constant NAV pricing. - Tools for constant-NAV MMMFs: liquidity fees and redemption gates. - FSOC 2018 annual report: recommended SEC continue to monitor impact of reforms in light of approximately $1 trillion shift from prime MMMFs to government MMMFs since adoption of reforms. - MMMFs filing requirements: - File Form N-MFP monthly with information on service providers, maturity, liquidity, assets and liabilities, and full holdings. - File Form N-CR upon occurrence of certain specified events (e.g., default or insolvency of a portfolio security issuer). ### Mutual funds: swing pricing and liquidity risk programs - September 2015 SEC proposal for mutual funds and ETFs addressed enhanced liquidity risk management, disclosures, and allowed swing pricing; proposal adopted and implemented. - Open-end funds required to have liquidity risk management programs and enhanced data reporting; swing pricing permitted under certain circumstances to pass transaction costs to transacting shareholders. ### Triparty repo (TPR) reforms and repo market resilience - Infrastructure improvements in TPR market: intra-day credit extended to collateral providers reduced by over 95 percent due to practice and process changes. - Clearing banks limited to funding a maximum of 10 percent of a dealer’s notional tri-party book through pre-committed lines and incur a capital charge for such credit extension. - Remaining risks: - Risk of collateral fire-sales reduced but not eliminated by post-crisis capital and liquidity regulations. - Intraday counterparty risk exposure contracted significantly, but potential for fire sales of collateral by creditors of a defaulted broker-dealer remains significant. - Data gaps limit regulators’ ability to monitor aggregate repo market and interdependencies among firms/participants. ### Securities lending: data and reporting - 2016 joint securities lending data collection pilot by OFR, FRB, and SEC collected information voluntarily from seven securities lending agents. - FSOC expressed view that without comprehensive information on securities lending activities regulators cannot fully assess financial stability risk and encouraged rulemaking for permanent data collection. - October 2016 SEC adopted new reporting requirements for registered investment companies including annual information on securities lending beginning June 1, 2018. ### Broker-dealer regulation, derivatives margin, and leverage - U.S. authorities regulate leverage via product and participant rules: margin rules for securities transactions, central clearing of derivatives, and margin for uncleared swaps. - Swap dealer rules: - October 2015: FRB, FDIC, OCC, FCA, FHFA issued final rule establishing capital and margin requirements for swap dealers and major swap participants; variation margin phased in between September 1, 2016 and March 1, 2017; initial margin began on September 1, 2016 and phased in over four years. - January 2016: CFTC final rule on margin requirements for uncleared swaps; cross-border application published May 2016; initial margin phase-in started September 1, 2016; variation margin effective March 1, 2017. - November 2018: CFTC amended rules to harmonize with prudential regulators. - CFTC issued comparability determinations for Japan (September 2016, updated March 2019), European Union (October 2017), and Australia (March 2019). ### Data availability across repo, triparty repo, and securities lending markets - Published data: triparty and GCF repo markets regularly publish data. - February 2019: OFR adopted rules requiring daily reporting by covered central counterparties of centrally cleared repo transactions (about one-quarter of all U.S. repo transactions). - FRBNY collects trade-by-trade data on tri-party repo transactions daily from Bank of New York Mellon. - February 2019 OFR final rule requires FICC to report data on FICC-cleared repo transactions beginning October 2019; FRB to act as OFR’s collection agent with data submitted to FRBNY. - Prior to rule, FRBNY relied on voluntary agreement with FICC affiliate for bilateral repos and GCF transactions data. ### Liquidity backstops, crisis preparedness, and emergency lending - Primary Credit Facility: - Federal Reserve evaluated role of the Primary Credit Facility in 2016 as part of long-run operating framework review; FOMC November 2016 discussed stigma associated with discount window; no changes made then. - Continued staff study, including an October 2017 conference on discount window stigma. - Emergency lending under Section 13(3): - November 2015: Federal Reserve approved final rule specifying procedures for emergency lending under Section 13(3) of the Federal Reserve Act. - Rule defines "broad-based" as “a program or facility that is not designed for the purpose of aiding any number of failing firms and in which at least five entities would be eligible to participate.” - Solvent non-banks designated systemically important by FSOC could participate in programs to extent they meet facility eligibility requirements. - FSOC coordination: - FSOC used as a forum to discuss fast-emerging topics (Brexit, Hurricane Sandy, MF Global) but crisis preparedness and management not formally assigned to FSOC; statutory purpose unchanged since prior FSAP. ### Resolution frameworks and recovery planning - Orderly Liquidation Authority (OLA): - Systemically important U.S. insurance holding companies can be resolved using OLA powers; resolution of individual legal entity insurance company subsidiaries remains with State-based resolution regimes. - State regimes have tools for liquidation or runoff but not tested on insurance subsidiaries of systemically important holding companies. - Single Point of Entry resolution generally would not affect U.S. branches of foreign banks. - Cross-border coordination and depositor preference: - Depositor preference rules for insured depository institutions under FDI Act can complicate coordination and increase ring-fencing risk; host authorities may mitigate by requiring branches to amend deposit agreements to extend preference to depositors. - Recovery and resolution plans: - Recovery plans: responsibility of firm senior management; board oversight; updated at least annually; identify triggers (quantitative/qualitative), escalation, severe stress scenarios, and credible response options. - OCC December 27, 2018: revised enforceable guidelines for recovery planning—raised average total consolidated assets threshold for applicability from $50 billion to $250 billion; decreased compliance period from 18 months to 12 months; other guidelines remain unchanged. - FDIC resolution plans: developed for G-SIFIs including strategies and operational plans meeting Key Attributes standards. - Living wills: FRB and FDIC have reviewed multiple iterations since 2012 and issued substantial feedback; December 2017 joint feedback to eight largest domestic BHCs identified areas needing more work: intra-group liquidity; internal loss-absorbing capacity; derivatives; payment, clearing, and settlement activity. - December 2018: FDIC and FRB issued final resolution plan guidance and joint feedback to largest four foreign banking organizations with U.S. operations. - Next submissions from U.S. G-SIBs expected in July 2019; other firms’ plans due December 2019 and July 2020. - TLAC and related measures: - December 2016: FRB final rule imposes TLAC and long-term debt requirements on eight U.S. G-SIBs and on U.S. IHCs of foreign GSIBs; final rule consistent with FSB TLAC standard but stricter in some respects and imposes clean holding company requirements. - April 2019: U.S. banking agencies jointly proposed restrictions on investments in TLAC instruments (consistent with BCBS TLAC Holdings standard). - Insurance group-level resolution tools: - NAIC Macro Prudential Initiative (MPI): reviewing resolution planning value for large insurance groups; aims to better monitor and respond to external financial/economic risks and risks transmitted by insurers to broader financial markets. - Revisions to NAIC model holding company act authorize state insurance regulators to act as group-wide supervisor (GWS) for identified IAIGs, including power to order mitigation of material risks and require development of resolution/recovery plans. - Revisions adopted in 29 states and required to be adopted in all accredited U.S. states/jurisdictions by January 1, 2020. ### Financial Market Infrastructures (FMIs) - U.S. authorities focused on resilience and recoverability of FMIs, especially CCPs; participation in international work streams continued. - Domestic actions include: - Adoption of risk management standards for systemically important FMIs, including expectations for recovery and orderly wind-down planning; authorities examine viability and comprehensiveness of recovery/wind-down plans. - FDIC and CFTC co-host CMG meetings for two U.S. CCPs considered systemically important in multiple jurisdictions (Chicago Mercantile Exchange and ICE Clear Credit, LLC); next CMG meetings scheduled for June 2019. - September 2016: CFTC issued final cybersecurity testing rules for FMIs and markets. - May 2018: FRB supported CPMI strategy for reducing wholesale payments fraud related to endpoint security and engaged domestically to advance strategy. - International efforts: - Participation in Study Group on Central Clearing Interdependencies (SGCCI) (FSB/IOSCO/BCBS); analyses published July 2017 and August 2018. - Participation and co-chairing roles in Derivatives Assessment Team and CPMI-IOSCO work on CCP supervisory stress testing, resilience, recovery guidance, and cyber resilience guidance (reports published July 2017, April 2018, June 2016). - Participation in FSB work streams on CCP resolution and continuity of access to FMIs; FDIC co-chairs FSB CCP resolution work stream with publications July 2017 and November 2018. - Federal Reserve accounts for designated FMIs: - By December 2017, requests from designated FMIs authorized by Federal Reserve Banks of Chicago and New York. - Five U.S. FMIs designated as systemically important utilities authorized to open central bank accounts: ICE Clear Credit, CME Inc., Options Clearing Corporation, National Securities Clearing Corporation, and Fixed Income Clearing Corporation (eligibility pursuant to section 806 of the Dodd-Frank Act). ### Housing finance - No comprehensive legislative or executive reform to substantially reduce Fannie Mae and Freddie Mac footprint since prior FSAP. - FHFA as conservator required market-based credit risk transfers from Enterprises to private sector; between initiation in 2013 and June 2018 Enterprises transferred portion of credit risk on approximately $2.5 trillion of unpaid principal balance (UPB) with combined Risk in Force (RIF) of about $81 billion. - Enterprises developed common securitization platform; FHFA issued final rule on uniform mortgage-backed security in February 2019 to align Enterprise policies affecting cash flows of TBA-eligible securities; requirements apply to current offerings and new Uniform Mortgage-Backed Security (UMBS) planned to begin issuance in June 2019. - FHFA directed Enterprises since 2015 to fund Housing Trust Fund and Capital Magnet Funds by transferring a portion of total new acquisitions; FHFA may suspend allocations if they contribute to Enterprise financial instability. - Senior Preferred Stock Purchase Agreements (PSPAs) with Treasury provide financial support; capital reserve amount had been declining by $600 million per year scheduled to decline to zero by January 2018; December 21, 2017 FHFA and Treasury agreed to reinstate a $3 billion capital reserve amount for each Enterprise to prevent draws on PSPA due to normal income fluctuations. - December 2017 tax cuts caused Enterprises to draw a combined total of $4 billion at end of that quarter due to value loss in deferred tax assets following Tax Cuts and Jobs Act of 2017. - June 2018: FHFA proposed rule on Enterprise capital requirements (new risk-based capital framework and two alternatives for revised minimum leverage capital requirement); capital requirements would remain suspended while Enterprises remain in conservatorship. - March 27, 2019: White House Presidential Memorandum on Federal Housing Finance Reform establishes principles and assigns Secretaries of Treasury and HUD to develop administrative and legislative reform plans in consultation with other agencies including FHFA. ### IMF staff relations, data, and selected statistics (informational annex) - Fund relations and statistics: - Membership: Joined December 27, 1945; Article VIII. - Quota: 82,994.20 SDR Million (100.00 percent of Quota). - IMF's Holdings of Currency (Holdings Rate): 67,520.97 SDR Million (81.33 percent of Quota). - Reserve Tranche Position: 15,499.34 SDR Million (18.68 percent of Quota). - New Arrangements to Borrow: 2,133.92 SDR Million. - SDR Department net cumulative allocation: 35,315.68 SDR Million (100.00 percent of Allocation); Holdings: 36,568.00 SDR Million (103.55 percent of Allocation). - Projected payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs): - Principal: 0.55 for 2019, 0.55 for 2020, 0.55 for 2021, 0.55 for 2022, 0.55 for 2023. - Charges/Interest: 0.55 for 2019, 0.55 for 2020, 0.55 for 2021, 0.55 for 2022, 0.55 for 2023. - Total: 0.55 for 2019, 0.55 for 2020, 0.55 for 2021, 0.55 for 2022, 0.55 for 2023. - Exchange rate arrangements: U.S. dollar floats independently; United States accepted obligations under Article VIII Sections 2(a), 3 and 4; maintains exchange system free of multiple currency practices and restrictions on payments/transfers for current international transactions except measures for security reasons; last notification of security measures was November 9, 2018. - Data availability: United States adheres to Special Data Dissemination Standard Plus; metadata posted on Dissemination Standards Bulletin Board. - Table of Common Indicators Required for Surveillance (As of May 20, 2019) included frequency and latest observation dates for indicators such as exchange rates, reserve assets, monetary aggregates, interest rates, CPI (2019 M4), government accounts (2018 Q4), GDP/GNP (2019 Q1), external current account balance (2019 Q1), gross external debt (2018 Q4), international investment position (2018 Q4). ### Statements and perspectives (June 2019) - Statement by Staff Representative (June 21, 2019): reports information available since staff report; notes measures under Executive Orders relating to Nicaragua, Iran, and Venezuela adopted November 2018, January 2019, and May 2019 notified to Fund on June 20, 2019 under Decision No. 144-(52/51). - Statement by U.S. Executive Director and advisors (June 21, 2019) summarized U.S. authorities’ views: - U.S. economy robust; real GDP grew 3.1 percent in Q1 2019. - Unemployment 3.6 percent in April 2019 and remained in May 2019 (49-year low). - Productivity: annualized productivity growth of 3.4 percent in Q1 2019. - Real average hourly wages grew 1.4 percent in the year to April 2019. - Headline PCE inflation rose 1.5 percent in the year to April 2019. - Administration projects real economic growth about 3 percent annually this year and over the medium term. - Fiscal sustainability: Administration aims to raise potential growth and reduce non-defense discretionary spending; intends to return primary balance to modest surplus by 2024. - Housing, social outcomes, opioid response, trade policy, and monetary policy perspectives were outlined, including view that Federal Reserve monetary policy is data-dependent and that balance sheet reduction concludes by end of September (FOMC announcements referenced). - Financial stability views: risks moderate; U.S. banks well capitalized; stress testing regime rigorous (DFAST and CCAR); supports activity-based FSOC interpretive guidance over entity-based designations. - Asset management: SEC reforms and stress testing for MMMFs noted; IMF staff recommendation to subject all asset managers to liquidity provisions and stress testing viewed as inconsistent with asset managers' business model. - Leveraged loans: concerns exist but mitigants include CLO lock-ups, longer tenors, higher equity tranches; FSOC coordination ongoing. - Anti-corruption: U.S. prosecutorial efforts, sanctions, advisories highlighted; commitment to work with Congress on beneficial ownership information legislation. *Source: IMF staff report content supplied in the provided PDF excerpt.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1usaea2019001.pdf_