## 1usaea2020001 ## Source details **Canonical URL:** [1usaea2020001](https://www.imf.org/-/media/files/publications/cr/2020/english/1usaea2020001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2020/english/1usaea2020001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2020/english/1usaea2020001.pdf.json) --- ### The pre-COVID landscape: macro outcomes and social challenges - U.S. economy entering 2020: longest expansion on record; output close to potential; unemployment near the natural rate; policy settings at neutral. - Labor market and income (precise measures): - Unemployment rate (February 2020): 3.5 percent (overall); White, not Hispanic: 3.1 percent; African American: 5.8 percent; Hispanic: 4.4 percent. - Official poverty measure (2018): 11.8 percent (overall); White, not Hispanic: 8.1 percent; African American: 20.8 percent; Hispanic: 17.6 percent. - Median household income (US$ thousand, 2018): 63.2 (overall); White, not Hispanic: 70.6; African American: 41.4; Hispanic: 51.5. - Median household net wealth (US$ thousand, 2016): 97.3 (overall); White, not Hispanic: 171.0; African American: 17.6; Hispanic: 20.7. - COVID-19 health disparities (data as of July 7, 2020 for 40 states + DC): - COVID-19 death rate (per 100,000 population): 36.8 (overall); White, not Hispanic: 30.2; African American: 69.7; Hispanic: 33.8. ### Model “Reading ‘the Stars’”: steady-state parameterization and findings (Box 1) - Model structure and steady-state definitions: - IS-relationship, Phillips Curve, Taylor Rule, and factor approach for activity, inflation, labor underutilization, and wages. - Steady state: inflation = 2 percent; wage growth = trend productivity growth + long-run inflation expectations; federal funds rate = neutral rate; unemployment = NAIRU; output = potential. - Key findings: - Since 2000 the U.S. operated below full capacity; moved further from potential after 2008-9 and only reached full employment in late 2018. - Weak wage and price pressures even late cycle corroborate below-capacity operation. - Neutral real rate (r*) declined substantially since the mid-1990s in inflation-adjusted terms. - Potential growth experienced a secular decline after the dot-com bust with modest recent increases due to higher investment and labor force participation. - Overall pre-COVID characterization: U.S. economy close to its balanced growth path. ### Financial vulnerabilities and corporate leverage - Banking system: well-capitalized with substantial liquidity buffers entering 2020. - Non-financial corporate debt (end-2019): 47 percent of GDP. - Investment grade corporate bonds and commercial paper: 25 percent of GDP. - Non-investment grade bonds and leveraged loans: 14 percent of GDP. - Much corporate debt held by nonbank investors; vulnerabilities mitigated by favorable issuance terms and liquid assets held by indebted companies. - Main financial stability concern: high corporate leverage and weakening underwriting standards across corporate liabilities. ### Trade policy developments and uncertainties - Tariffs and disputes: - Tariffs on steel, aluminum, certain household appliances; 25 percent tariffs retained on around US$200 billion of imports from China. - Ongoing disputes with EU member states (digital taxation, Airbus subsidies, autos). - February Department of Commerce rule: allows currency undervaluation to be considered as a countervailable subsidy. - Regional development: - United States-Mexico-Canada Agreement came into effect on July 1, 2020; modernized provisions in services, e-commerce, data transparency; introduced more stringent rules-of-origin requirements. ### The policy response and the economic shock from COVID-19 - Financial markets and liquidity: - Equity markets fell by one-third over roughly a month; 10-year Treasury yield fell by around 100 basis points. - Systemic liquidity problems emerged across U.S. asset markets and in overseas dollar funding markets. - Labor market collapse: - Unemployment rate: 3.5 percent (February) → 14.7 percent (April); close to 20 percent once misclassification errors accounted for. - Labor force participation rate: 63.4 percent (February) → 60.2 percent (April). - Over 25 million Americans lost their job within two months. - By June: unemployment fell to 11.1 percent; employment-population ratio rose to 54.6 percent. - Job losses disproportionately affected lower income households, those without college education, women, African Americans, and Hispanics; many risk losing employer-provided health insurance. - Output and consumption: - Output expected to contract by 37 percent in the second quarter. - Personal consumption spending fell by 18 percent between February and April; grew by 8 percent between April and May. - Consumption collapse concentrated in labor-intensive, face-to-face services; decline largely driven by reduced discretionary spending by high-income individuals. - Household saving and transfers: - Household saving rate (May): 23 percent of disposable income (up from around 8 percent pre-pandemic). - Spike driven by compressed consumption and large government transfers (direct payments and expanded unemployment insurance under CARES Act). - External position outlook: - External position in 2019 moderately weaker than implied by fundamentals. - Forecast: increase in private-sector saving and decline in investment expected to offset fiscal deficit, implying a current account deficit of around 2 percent of GDP in coming years. ### State-level reopening, mobility, and labor market effects (Box 2) - Mobility as de facto reopening measure: - Mobility linked to retail and recreation declined by around 40 percent during full-lockdown period, largely before formal stay-at-home orders. - Mobility began rising even before restrictions loosened, indicating individual health and economic concerns shape recovery. - Heterogeneous employment effects: - Decline in mobility correlated with job losses primarily in states with low IT intensity. - Technology-oriented states showed little correlation, reflecting greater work-from-home capacity. - States less IT-intensive face tradeoffs between reopening speed, public health outcomes, and job loss magnitude. - Public health management: - Emerging evidence: increased spread around 30 days after stay-at-home orders loosened. - Lifting restrictions too quickly risks renewed infections and reversals in reopening. ### Impact on the U.S. oil sector (Box 3) - Demand and price dynamics: - Transport accounts for 60 percent of oil demand; lockdowns severely reduced transport demand. - WTI spot price fell to unprecedented levels in April; subsequently recovered but remains 40 percent below pre-COVID levels. - Financial stress and structural implications: - Yields on oil company debt at exceptionally high levels; energy firm bankruptcies rose to a decade-long high. - Bankruptcy filings to date: 215 oil firms and 204 servicing firms. - 1-year ahead probability-of-default across U.S. energy firms reached a record high in March. - Production economics and outlook: - Average break-even price for new shale wells: around US$45. - Break-even for existing production: around US$25. - EIA projection: U.S. oil production to fall from 12.3 mb/d in 2019 to 10.8 mb/d by 2021. - Likely outcome: many higher-cost U.S. producers may be non-viable; bankruptcies or acquisitions likely to continue rising. - Macroeconomic transmission: impact of lower oil prices on consumption likely relatively muted. ### Emerging policy themes and implications - Balance public health and economic reopening: reopening carries tradeoffs; premature lifting risks renewed infection waves. - Support for households and sectors: large fiscal transfers supported incomes and elevated saving; supplemental unemployment benefits expected to support consumption for those out of work or with reduced hours. - Financial stability monitoring: non-financial corporate debt at 47 percent of GDP (end-2019) and stressed energy sector warrant continued monitoring and targeted interventions. - External and macro-financial outlook: current account deficit around 2 percent of GDP projected, with significant uncertainty. ### Federal Reserve immediate actions and market impact - Policy moves: - March 15: FOMC lowered federal funds target range to 0 to ¼ percent and signaled maintenance until confident of recovery. - Fed increased holdings of Treasury and agency MBS and undertook large-scale repo operations. - Fed balance sheet expanded by around US$2 trillion between mid-March and mid-April and continued growing rapidly. - Market outcomes: - Actions rapidly normalized liquidity and market functioning in key fixed income markets. - Positive international spillovers: eased global financial conditions and increased access to loans for overseas sovereign and corporate borrowers. - Global dollar funding and swap lines: - Expanded swap lines and established temporary repo facility for foreign and international monetary authorities. - New swap lines with Australia, Brazil, Denmark, Korea, Mexico, New Zealand, Norway, Singapore, and Sweden; cost reduced and maturities extended. ### Emergency lending facilities under Section 13(3) and CARES Act support - Section 13(3) overview: permits Fed to provide liquidity in unusual and exigent circumstances. - Facility structure: - (i) Fed standing facility providing liquidity collateralized by assets; - (ii) Fed liquidity to SPVs providing collateralized loans or purchasing bonds/loans; - (iii) Main Street Lending program for smaller companies and nonprofits. - Congressional backing: US$454 billion appropriated to Treasury to backstop facilities. - Announcement effect: boosted liquidity across credit markets. ### Assessment of Fed measures and market outcomes (Box 4) - Fed steps described as well-designed and instrumental in restoring market functioning. - Coinciding market moves: - Spreads on investment grade corporate bonds fell by 200 basis points. - Equity markets rebounded; market volumes and bid-ask spreads normalized. - Swap line expansion mitigated global dollar funding strains and had positive spillovers. ### Fiscal actions: scope, cost, and near-term effects - Four rounds of legislation in March and April to assist households, businesses, and state/local governments. - Fiscal cost and public finances: - Federal government primary deficit expected: around 3 percent of GDP (FY2019) → 16 percent of GDP (FY2020). - Federal debt expected to rise steeply to close to 100 percent of GDP by end-2020. - State and local government deficits expected to more than double in 2020. - Economic effects: - Fiscal package provided essential “life support,” preserved employer-employee relationships, prevented corporate bankruptcies, supported healthcare providers, and provided breathing space to state and local governments. - Direct cash payments and expanded unemployment benefits protected household income and contained overall increase in poverty rates. - Parolin and others (2020): absence of CARES Act would have raised poverty rates to 16.3 percent in 2020; CARES Act transfers could maintain poverty rates at pre-crisis levels. ### Key fiscal measures (Box 5 — selected items and amounts) - Cash payments: US$1,200 per adult (plus US$500 per child) for those with gross annual income of less than US$75,000 (US$150,000 for a couple filing jointly); benefit reduced by 5 percent for income in excess of limit. - Enhanced/expanded unemployment benefits: - Duration extended to 39 weeks with a supplemental US$600 per week paid until end-July 2020. - Median worker benefits amount to 134 percent of earnings; 5 out of 6 workers received benefits in excess of previous earnings due to supplement. - Assistance to distressed sectors: - US$29 billion for airlines; US$17 billion direct loans/guarantees for businesses critical to national security. - US$454 billion appropriated to backstop Section 13(3) Fed facilities. - Paycheck Protection Program: SBA loans and guarantees to companies with up to 500 employees; forgiveness conditional on maintenance of pre-crisis payroll. - Employee retention tax credit: Equals 50 percent of the qualified wage through end 2020 with a cap of $5,000 per employee. - Transfers to subnational governments: US$150 billion. - Healthcare appropriations: US$175 billion. - SDR28 billion for the IMF’s New Arrangement to Borrow. ### Outlook and risks to the recovery - Baseline GDP path: - GDP projected to end 2020 around 6½-7 percent below end-2019 levels; recover a further 4 percent in 2021. - By 2025, GDP would remain 4-5 percent below pre-pandemic expected activity. - Potential GDP and output gap: - COVID-19 assumed to have immediate impact on level of potential GDP; constraints on safe activity in in-person services assumed binding for some time. - Principal risks: - Resurgence in COVID-19 cases leading to renewed partial shutdowns. - Uncertainties about policy changes (schools, cross-border travel, immigration). - Labor market and reallocation risks: - By June, 4.6 million workers had left the labor force. - Hysteresis effects expected; potential wave of corporate bankruptcies and significant reallocation needs. - Policy contingencies: - Staff outlook excludes future monetary or fiscal stimulus beyond measures in place and does not assume imminent vaccine discovery. - Additional policy efforts or rapid progress on vaccines/therapeutics would accelerate recovery. ### Inflation risk and demand slack - Large slack increases risk of extended period of low or negative inflation. - Persistently high unemployment likely to put downward pressure on wages. - Global excess capacity in tradable goods and commodities likely source of imported disinflation. - Countervailing cost pressures expected to shift relative prices but not induce generalized upswing in core or headline inflation. - Prolonged low inflation would mute monetary policy impact (effective lower bound), could delay purchases, weaken demand, and exacerbate balance sheet stress amid higher indebtedness. - Measurement caution: rapid changes in consumption bundle complicate inflation measurement. ### Poverty, distributional impacts, and labor market - Depth and sectoral distribution of losses likely to cause systemic increase in poverty and longer-term growth risks. - Poverty already high pre-pandemic with racial dimensions: African Americans and Hispanics more likely to be poor, unemployed, and uninsured. - Near-term mitigation: supplemental unemployment insurance and economic impact payments. - Projections and risks: - Poverty rate likely to spike above levels reached during the global financial crisis (official poverty rate rose above 15 percent during that period). - Median household disposable income could take several years to recover to 2019 levels. - Historical precedent: post-2008-9, real median household income fell by over 8 percent and took nine years to recover. ### Debt accumulation and financial vulnerabilities - Fiscal response expected to lead general government debt to rise to 160 percent of GDP by 2030 (staff projection). - Corporate debt rose above already-high pre-pandemic levels as firms drew on credit lines and issued new debt. - Low or negative inflation, resource reallocation needs, and slow earnings recovery will combine to raise corporate failures. - Market valuations appear stretched, leaving vulnerability to market volatility and tightening of financial conditions. ### State and local government stresses - State/local finances shifted from near primary balance to expected deficit of 2-3 percent of GDP in 2020. - Balanced budget requirements (except Vermont) may force cyclical spending cuts. - Downside risks of subnational tightening: - Macro headwind to federal efforts to boost activity. - Distributional impact: cuts disproportionately affect low income households; two-thirds of state/local outlays are social assistance, health, and education. ### Corporate sector liquidity and solvency prospects (Box 6) - Stress test sample: 750 U.S. firms accounting for two-thirds of total corporate borrowing. - Liquidity challenges: - Energy sector outstanding debt: US$580 billion (10 percent of investment grade loans and bonds). - Energy firms account for almost 70 percent of corporate liquidity needs through end-2020. - If energy firms cannot issue new debt, over 80 percent of the outstanding debt stock in the sector would hit a binding liquidity constraint by year-end. - Estimated liquidity needs in other sectors: between US$290-619 billion by end-2020 (depending on pre-crisis investment levels). - Solvency risks: - Around 15 percent of the debt of non-investment grade, non-energy firms (US$485 billion in total borrowing) predicted to have negative equity by end-2020. - These firms concentrated in entertainment, technology, and transportation and likely to enter bankruptcy. - Debt issuance needs in 2020 by remaining solvent, high-yield firms: between US$90-140 billion depending on investment spending. ### The future direction of fiscal policy — guidance and size - Priority: build political consensus around a fiscal package to accelerate recovery; immediate funding for health response should continue. - Fiscal package objectives: - Address deep-rooted social and economic challenges. - Address environmental concerns. - De-escalate trade conflicts. - Meet challenges and opportunities from accelerated digitalization. - Size guidance: - Model-based analysis suggests appropriate additional fiscal package could be in the order of 10½ percent of GDP over the next three years under staff’s baseline. - If downside risks materialize: a 1 percent of GDP increase in the end-2020 output gap would add about 1½ percent of GDP to desired package over three years. - Warning: insufficient fiscal response risks placing excessive burden on monetary policy. ### Policy recommendations — tax, social assistance, health, and labor-market measures - A. Tax policies - Increase personal income tax credits targeted to the most vulnerable: - Increase Earned Income Tax Credit generosity and eligibility (especially for childless workers). - Raise the child tax credit (making it fully refundable up to a specific income level). - Consider targeted credits for job training or relocation expenses. - Front-load support and consider advanced payments with careful administration. - Convert business tax to a full cash flow tax: - Immediately expense all new capital investments; make temporary expensing provisions permanent and expand. - Gradually phase out deductibility of interest costs associated with financing such investments. - Possible tax benefit creditable against other obligations or refundable. - Consider WTO compatibility and spillover effects for any border adjustment design. - B. Tackling poverty and supporting displaced workers - Complement tax credits with permanent expansion in eligibility and size of social assistance. - Mitigate racial inequities via targeted measures. - Focused policies: - Increased funding for Supplemental Nutrition Assistance Program and temporary suspension of attached work requirements. - Consider increasing direct cash aid to poor families (e.g., through Temporary Assistance for Needy Families). - Temporarily expand Section 8 housing voucher program. - Health system measures - 25.6 million Americans lack health coverage; employer-provided insurance predominates. - Policy options: - Preserve employer-employee relations to mitigate loss of coverage. - Ensure Medicaid and CHIP can meet increased demand. - Consider temporarily increasing federal share of Medicaid spending (Family First Act increased FMAP by 6.2 percentage points during COVID-19 emergency). - Incentivize states to expand Medicaid and/or raise income limits; states could run awareness campaigns to widen coverage. - If the 14 states that have not adopted Medicaid expansion do so, estimated 2.8 million uninsured adults would have access to Medicaid coverage in 2021. ### Federal Reserve reaction, additional monetary options, and assessments - Fed immediate response: rapid rate cut to 0 to ¼ percent; large asset purchases; expanded repo and swap facilities; liquidity provision effective in stabilizing markets. - Monetary options discussed: - Asset purchases: scope to scale up Treasury and MBS purchases; effects modest given lower bound; costs include duration risk and potential for increased risk-taking. - Forward guidance: strengthen commitments (e.g., maintain rates until PCE inflation rises above 2 percent); potential for temporary price level targeting. - Yield curve control: could strengthen guidance but may require very large purchases and carries balance sheet risk; targeted short-to-medium maturity caps considered. - Negative interest rates: risks to bank profitability, money market funds, and financial stability; staff assessment does not favor introduction in U.S. - Expanded lending/increased purchases: size/duration of facilities could be extended but scaling credit allocation risks political controversy and footprint concerns; Treasury better positioned for credit/guarantee roles. - Authorities’ views: Fed ready to use full range of tools; negative rates not regarded appropriate; no decision yet on yield curve control; some 13(3) interventions expected to expire gradually. ### Financial system oversight — resilience, vulnerabilities, and regulatory recommendations - System resilience: banks entered crisis with sizable capital and liquidity buffers; nonbanks and capital markets largely absorbed shifts. - Stress-test findings (FSSA): - Banks’ capital depletion rates expected large but manageable. - Incremental capital need in a downside scenario: 1.7 percent of GDP over three years to meet Tier-1 common equity requirements; could be met largely by temporary suspension of shareholder payouts. - Under severe assumptions only one GSIB would be unable to fund cash needs for 30 days. - Actions on bank capital distributions: - Fed prohibited share buybacks and limited dividend payments (capped to be below bank’s income over preceding four quarters) for third quarter; may be extended quarterly. - Recommendation: tighter limits on dividends, re-evaluate treatment of buybacks vs. dividends, extend binding period into 2021. - Institutional and macroprudential recommendations: - Provide explicit financial stability mandate to federal FSOC members; intensify FSOC crisis preparedness. - Develop macroprudential tools for nonbanks. - Increase independence and resources of CFTC and SEC; enhance CCP risk management and stress testing. - Transition to principles-based reserving for insurers and develop consolidated group capital requirements. - Ensure market functioning plans if Bank of New York Mellon unable to settle/clear repo; permit bilateral emergency liquidity assistance to systemically important nonbanks. ### Supervisory, regulatory, and data recommendations - Reform prudential guidance into regulation where appropriate; review tailoring for non-internationally active banks to align with Basel framework. - Apply liquidity stress testing to money market funds via SEC. - Encourage banks to explicitly plan for discount window use and fungibility of Treasuries and reserves. - Address data gaps: - Expand data on bilateral repo, triparty repo, securities lending, and asset management. - Make TRACE pilot for Treasury reporting permanent. - Expand interbank exposure data beyond six GSIBs. - Improve data on CLO holdings, exposures to leveraged and private loans, and nonbank connectivity. ### Authorities’ views and official stance - Authorities acknowledged extraordinary uncertainty but expected historically high growth and employment gains in Q3 and Q4. - Support for more help to small businesses, incentives to invest and rehire, and measures to preserve employer-employee relationships to maintain healthcare coverage. - Authorities emphasized significant fiscal space and ability to sustain policy support if needed, with commitments to transparency and accountability. - Concern expressed about avoiding bail-outs for states that pursued poor policies; federal transfers should target essential services and avoid rewarding past mismanagement. ### Policy priorities, size of stimulus, and model-based recommendations (Box 7) - Buffer-Stock model calibration: - Fiscal multiplier: 0.6–1 in equilibrium; state contingent and above 1 at bottom of cycle. - Primary balance reaction: deteriorates by 0.35 percent of GDP for each 1 percent fall in GDP. - Interest rates: increase by 0.5 basis points for each 1 percent increase in debt-to-GDP ratio. - Debt trigger for loss of market access set at 200 percent of GDP. - Key recommendation: - Recommended cumulative fiscal stimulus: about 10½ percent of GDP through 2023 to restore full employment. - Under current policies (no additional stimulus): structural primary balance tightens as CARES Act measures phase out; output gap about 5 percent in 2020 and 1.7 percent in 2021. - Model objective: bring economy to full employment by 2022. - Debt implication: general government debt would rise to about 155 percent of GDP by 2023 under recommended path. - Sensitivities: - If output gap starts 1 percent of GDP larger, recommended cumulative stimulus over three years would be 1.5 percent of GDP higher. - In vaccine scenario, optimal stimulus would be significantly larger because capacity utilization would recover quickly. ### Outlook, projections, and selected economic indicators (IMF staff projections) - U.S. real GDP (percent change): 2018: 2.9; 2019: 2.3; 2020: -6.6; 2021: 3.9; 2022: 3.3; 2023: 2.3; 2024: 1.9; 2025: 1.8. - Unemployment rate: 2018: 3.9; 2019: 3.7; 2020: 9.2; 2021: 8.1; 2022: 6.3; 2023: 5.0; 2024: 4.3; 2025: 4.2. - CPI inflation (q4/q4): 2018: 2.2; 2019: 2.0; 2020: 0.9; 2021: 2.4; 2022: 2.3; 2023: 2.3; 2024: 2.2; 2025: 2.2. - Core PCE Inflation (q4/q4): 2018: 1.9; 2019: 1.6; 2020: 0.8; 2021: 1.8; 2022: 1.9; 2023: 1.9; 2024: 1.9; 2025: 1.9. - Federal balance (% of GDP): 2018: -3.8; 2019: -4.6; 2020: -18.0; 2021: -10.4; 2022: -5.4; 2023: -4.5; 2024: -4.7; 2025: -4.9. - Federal debt held by the public (% of GDP): 2018: 77.4; 2019: 79.3; 2020: 99.6; 2021: 107.4; 2022: 106.8; 2023: 106.8; 2024: 107.4; 2025: 108.3. - Personal saving rate (% of disposable income): 2018: 7.7; 2019: 7.9; 2020: 16.2; 2021: 11.2; 2022: 8.4; 2023: 7.8; 2024: 7.8; 2025: 7.8. ### Balance of payments, fiscal outlook, and public debt sustainability (Appendices III–IV highlights) - Balance of payments: - Real exports growth: 2020: -10.8; 2021: 6.7; 2022: 4.7. - Current account balance (US$ billions): 2018: -450; 2019: -480; 2020: -436. - Fiscal outlook and public debt: - General government primary deficit: 4.1 percent of GDP (2019); projected at 20.5 percent of GDP in 2020. - Staff baseline effective interest rate: 1.0 percent rising to 2.0 percent by 2029. - Nominal gross public debt (percent of GDP): 2019: 108.7; 2020: 138.2; 2021: 142.2; 2029: 147.8. - Public gross financing needs (percent of GDP): 2019: 41.6; 2020: 59.1; 2021: 48.2. - Adjustment recommendations: - Additional 10½ percent of GDP stimulus through 2023 to restore full employment. - To place debt ratio on downward path, raise primary general government surplus to around ¾ percent of GDP (federal target primary surplus indicated at 1¾ percent of GDP). - Stress test sensitivities: - 100 basis point increase in sovereign risk premium → public debt ratio ~156 percent of GDP by 2029 (about 8 percentage points above baseline). - Combined macro-fiscal shock → public debt ratio could reach as high as 161 percent of GDP by 2029. ### External sector assessment and policies - 2019 external position: moderately weaker than level implied by fundamentals. - Staff projection: larger private saving expected to offset 2020 fiscal packages; relatively steady current account deficit of around 2 percent of GDP. - Recommended near-term policy: - Expand fiscal efforts to ease burden on households and firms. - Once immediate health crisis subsides, use fiscal space for a front-loaded package to increase infrastructure investment, facilitate transition to lower carbon economy, and offer consumption subsidies to kick-start demand. - Medium-term fiscal recommendation: - Reinvigorate consolidation aimed at medium-term general government primary surplus of about 3/4 percent of GDP. - Structural recommendations: - Upgrade infrastructure; enhance schooling, training, and mobility; support working poor; increase labor force growth (including skill-based immigration reform); roll back tariff barriers and resolve trade disputes. ### Risk Assessment Matrix (selected high-probability, high-impact risks and policy responses) - Prolonged COVID-19 outbreak - Likelihood: High; Impact: High. - Policy response: Fiscal packages to minimize balance sheet dislocations, preserve employer-employee relations, support household income; accommodative monetary policy; scale asset purchases and emergency credit facilities if needed. - More protectionism - Likelihood: High; Impact: Medium. - Policy response: Reverse trade restrictions; work with partners and WTO to address trade-distorting policies. - Widespread social discontent and political instability - Likelihood: High; Impact: Medium. - Policy response: Improve social assistance; support unemployed; increase healthcare resources and preparedness. - Oversupply in oil market - Likelihood: High; Impact: Medium. - Policy response: Fed Section 13(3) facilities for liquidity support; fiscal measures to facilitate industry adjustment. - Rising vulnerabilities in corporate sector - Likelihood: Medium; Impact: High. - Policy response: Emergency liquidity support if market dislocations emerge; preserve strong capital buffers; develop macroprudential tools for nonbank vulnerabilities. - Risks facing state and local governments - Likelihood: Medium; Impact: Medium. - Policy response: Large increase in federal transfers to states to support essential services and avoid procyclical subnational tightening. ### Staff appraisal: macroeconomic, social, and financial assessment and priorities - Pandemic derailed longest U.S. expansion; broad-based shutdown necessary to preserve lives and public health. - As of July 16, more than 136,000 Americans had died; almost fifteen million lost jobs (staff data reported). - Recovery likely prolonged; poorest households and labor-intensive, face-to-face service workers disproportionately affected. - Policy assessment: - Policymakers acted quickly and assertively (Fed liquidity support; fiscal measures for small businesses, healthcare, unemployment insurance, worker retention incentives, direct cash transfers, state/local support). - Further policy efforts needed to counter the pandemic and address long-standing challenges: poverty, inequalities, declining mobility, polarized income distribution, barriers to trade and foreign investment, unsustainable public debt. - U.S. has fiscal space that should be deployed quickly to hasten recovery, improve social safety net, and facilitate broader economic remaking. - Monetary policy: asset purchases could be scaled up; adapt forward guidance; consider yield curve control; avoid negative policy rates for U.S. context. - Financial stability: continued restraint on banks’ capital distributions and macroprudential focus on nonbank vulnerabilities. *Italic: Source — IMF staff report excerpt: “1. Reading ‘the Stars’”* ### 1. Reading “the Stars“ _____________________________________________________________________________ 7 ### 1. Reading “the Stars“ ### The pre-COVID landscape: macro outcomes and social challenges - The U.S. began 2020 in the midst of the longest expansion on record, with output close to potential, unemployment near the natural rate, and policy settings at neutral. - Labor market and income facts: - Unemployment rate (February 2020): 3.5 percent (overall); White, not Hispanic: 3.1 percent; African American: 5.8 percent; Hispanic: 4.4 percent. - Official poverty measure (2018): 11.8 percent (overall); White, not Hispanic: 8.1 percent; African American: 20.8 percent; Hispanic: 17.6 percent. - Median household income (US$ thousand, 2018): 63.2 (overall); White, not Hispanic: 70.6; African American: 41.4; Hispanic: 51.5. - Median household net wealth (US$ thousand, 2016): 97.3 (overall); White, not Hispanic: 171.0; African American: 17.6; Hispanic: 20.7. - COVID-19 health disparities (data as of July 7, 2020 for 40 states + DC): - COVID-19 death rate (per 100,000 population): 36.8 (overall); White, not Hispanic: 30.2; African American: 69.7; Hispanic: 33.8. ### Box 1 — Model “Reading ‘the Stars’”: steady-state parameterization and findings - Model components and objective: - IS-relationship for the business cycle, Phillips Curve linking inflation to the output gap, Taylor Rule for federal funds rate, and a factor approach to incorporate broad indicators of activity, inflation, labor underutilization, and wages. - Steady state defined by inflation at 2 percent, wage growth = trend productivity growth + long-run inflation expectations, federal funds rate = neutral rate, unemployment = NAIRU, output = potential. - Key model results: - Since 2000 the U.S. economy consistently operated below full capacity; after 2008-9 it moved further away from potential and only reached full employment in late 2018. - Lack of wage and price pressures even at late cycle stages corroborates this below-capacity operation. - The neutral real rate (r*) has declined substantially since the mid-1990s in inflation-adjusted terms. - Potential growth experienced a secular decline after the dot-com bust, with modest increases recently due to higher investment and labor force participation. - Overall characterization pre-COVID: the U.S. economy was close to its balanced growth path. ### Financial vulnerabilities and corporate leverage - Balance sheet and market posture entering 2020: - Banking system: well-capitalized with substantial liquidity buffers. - Non-financial corporate debt: 47 percent of GDP at end-2019. - Of that, 25 percent of GDP was in investment grade corporate bonds and commercial paper. - 14 percent of GDP was in non-investment grade bonds and leveraged loans. - Much corporate debt held by nonbank investors. - Vulnerabilities mitigated somewhat by favorable issuance terms and liquid assets held by indebted companies. - Financial sector concerns: - High levels of corporate leverage and weakening underwriting standards across various corporate liabilities cited as the most salient financial stability concern. ### Trade policy developments and uncertainties - Tariffs and disputes: - U.S. placed tariffs on steel, aluminum, and certain household appliances. - 25 percent tariffs retained on around US$200 billion of imports from China despite January agreement. - Ongoing disputes with EU member states (digital taxation, subsidies to Airbus, autos). - February Department of Commerce rule: allows currency undervaluation to be considered as a countervailable subsidy, increasing uncertainty about exchange rate analysis and potential countervailing duties. - Regional trade development: - United States-Mexico-Canada Agreement came into effect on July 1, 2020; alleviated trade uncertainty within the trading block and modernized provisions in services, e-commerce, and data transparency, while adding more stringent rules-of-origin requirements. ### The policy response and the economic shock from COVID-19 - Financial markets and liquidity: - Equity markets fell by one-third over roughly a month as the virus spread internationally. - The 10-year Treasury yield fell by around 100 basis points. - Systemic liquidity problems emerged across U.S. asset markets (including the market for U.S. Treasuries) and in overseas dollar funding markets. - Labor market collapse: - Unemployment rate rose from 3.5 percent in February to 14.7 percent in April (close to 20 percent, once misclassification errors are taken into account). - Labor force participation rate fell from 63.4 percent in February to 60.2 percent in April. - Over 25 million Americans lost their job within two months. - By June the unemployment rate fell to 11.1 percent (even as misclassification errors were reduced); employment-population ratio rose to 54.6 percent. - Job losses disproportionately affected lower income households, those without a college education, women, African Americans and Hispanics; many of these workers risk losing employer-provided health insurance. - Output and consumption: - Output is expected to contract by 37 percent in the second quarter. - Personal consumption spending fell by 18 percent between February and April. - Consumption grew by 8 percent between April and May as businesses reopened and rehired workers. - The consumption collapse concentrated in labor-intensive services with face-to-face interactions (restaurants, hotels, retail); decline largely driven by reduced discretionary spending by high-income individuals. - Household saving and transfers: - Household saving rate in May: 23 percent of disposable income (up from around 8 percent prior to the pandemic). - Spike in saving driven by compressed consumption and large government transfers: direct economic impact payments and expanded unemployment insurance under the CARES Act. - Historical evidence suggests direct payments typically do not translate into a significant boost to consumption; supplemental unemployment benefits expected to support consumption for those with reduced hours or unemployment. - External position outlook: - External position in 2019 moderately weaker than implied by medium-term fundamentals and desirable policies. - Forecast: increase in private-sector saving and decline in investment expected to offset increased fiscal deficit, implying a current account deficit of around 2 percent of GDP in coming years, with significant uncertainty. ### Box 2 — State-level reopening, mobility, and labor market effects - Mobility as a de facto reopening measure: - Mobility linked to retail and recreation declined by around 40 percent during full-lockdown period, largely occurring prior to formal stay-at-home orders. - Mobility began rising even before restrictions loosened, suggesting individual health and economic concerns strongly shape activity recovery. - Heterogeneous employment effects: - Decline in mobility correlated with job losses primarily in states with a low level of IT intensity. - Technology-oriented states saw little correlation between mobility declines and unemployment increases, reflecting greater ability to shift to work-from-home. - Implication: states less IT-intensive face a tradeoff between speed of reopening, public health outcomes, and job loss magnitude. - Public health risk management: - Emerging evidence indicates increased spread of the virus around 30 days after stay-at-home orders are loosened. - Causal links complicated by expanded testing and heterogeneity across states. - Lifting restrictions too quickly risks renewed infection increases and potential reversals in reopening, with negative implications for employment and activity. ### Box 3 — Impact on the U.S. oil sector - Demand and price dynamics: - Transport accounts for 60 percent of oil demand; lockdowns severely reduced mobility and transport demand. - WTI spot price fell to unprecedented levels in April; subsequently recovered but remains 40 percent below pre-COVID levels. - Financial stress and structural implications: - Fall in prices severely damaged financial health of many U.S. shale producers and oil field service companies. - Yields on oil company debt at exceptionally high levels; energy firm bankruptcies rose to a decade-long high. - Bankruptcy filings to date: 215 oil firms and 204 servicing firms. - 1-year ahead probability-of-default across U.S. energy firms reached a record high in March. - Production economics and outlook: - Average break-even price for new shale oil wells: around US$45, making much new production non-economic. - Break-even for existing production: around US$25. - Energy Information Administration (EIA) projection: U.S. oil production to fall from 12.3 mb/d in 2019 to 10.8 mb/d by 2021 (first decline since 2016). - Longer-term considerations: - The sector faces greater difficulty adapting than during 2014-16 price decline: slower expected price rebound, higher leverage since 2014, and potential accelerated shift to a lower-carbon economy that could structurally lower demand. - Likely outcome: many higher-cost U.S. producers may be non-viable; bankruptcies or acquisitions likely to continue rising. - Macroeconomic transmission: - The impact of lower oil prices on consumption is likely to be relatively muted; any positive effect on consumption is likely to be difficult to detect given overwhelming pandemic-related effects on financial conditions and confidence. ### Emerging policy themes and implications - Policy must balance public health and economic reopening: - Reopening decisions carry clear tradeoffs between employment outcomes and public health; premature lifting of restrictions risks renewed infection and activity reversals. - Support for affected households and sectors: - Large fiscal transfers (direct payments and expanded unemployment insurance) have materially supported household incomes and elevated saving; supplemental unemployment benefits expected to support consumption for those out of work or with reduced hours. - Financial stability monitoring and targeted interventions: - Elevated corporate leverage, high non-financial corporate debt (47 percent of GDP at end-2019), and stressed energy sector suggest continued monitoring and targeted policy measures to mitigate solvency risks. - External and macro-financial outlook: - Current account deficit around 2 percent of GDP projected in coming years, conditional on saving/investment adjustments and fiscal outcomes; substantial uncertainty remains. *Italic: Source — IMF staff report excerpt: “1. Reading ‘the Stars’”* ### 11. The Federal Reserve reacted quickly as the scale of the burgeoning pandemic became ### 11. The Federal Reserve reacted quickly as the scale of the burgeoning pandemic became ### Federal Reserve immediate actions and market impact - On March 15, the FOMC lowered the federal funds target range to 0 to ¼ percent and indicated it would maintain rates at this level until it is confident that the economy has weathered recent events and is on track to achieve the Fed’s maximum employment and price stability goals. - The Fed significantly increased its holdings of Treasury and agency mortgage backed securities and undertook large-scale overnight and term repo operations. - The Fed balance sheet expanded by around US$2 trillion between mid-March and mid-April, and continued to grow rapidly thereafter. - These actions were effective in rapidly normalizing liquidity conditions and market functioning in key fixed income markets. - Positive international spillovers: - Eased financial conditions globally. - Increased access to new loans for a range of overseas sovereign and corporate borrowers. ### Global dollar funding and swap lines - To reduce strains in global dollar funding markets, the Fed: - Expanded its swap lines with a range of central banks. - Established a temporary repo facility for foreign and international monetary authorities with accounts at the Federal Reserve Bank of New York. - New swap lines included those with Australia, Brazil, Denmark, Korea, Mexico, New Zealand, Norway, Singapore, and Sweden. - The cost of the swap lines was reduced, and their maturity was extended. ### Emergency lending facilities under Section 13(3) and CARES Act support - Section 13(3) of the Federal Reserve Act permits the Fed, in unusual and exigent circumstances, to provide liquidity to the financial system by discounting the liabilities of individuals, partnerships, and corporations. - Emergency lending facilities introduced in the second half of March were structured around: - (i) a Fed standing facility providing liquidity to financial institutions, collateralized by specific assets; - (ii) providing Fed liquidity to a special-purpose vehicle which, in turn, provides collateralized loans to financial institutions or purchases bonds and loans outright; or - (iii) direct lending through the Main Street Lending program to smaller companies and nonprofit organizations. - Congress appropriated US$454 billion to the Treasury to backstop these facilities and to absorb potential credit losses. - The announcement effect of these programs served to boost liquidity in a range of credit markets. ### Assessment of Fed measures and market outcomes - The steps taken by the Federal Reserve were described as well-designed, forceful and instrumental in supporting demand and restoring the normal functioning of financial markets. - Deploying large and front-loaded purchases of Treasuries and mortgage-backed securities alongside the various credit facilities coincided with: - Spreads on investment grade corporate bonds falling by 200 basis points. - Equity markets rebounding. - Market volumes and bid-ask spreads returning to more normal levels. - The expansion of swap lines and easing of access terms helped mitigate strains in global dollar funding markets. - These programs had positive spillovers to many other countries, helping maintain market functioning in global credit and dollar funding markets and facilitating a broad-based loosening of global financial conditions. ### Box 4 — Federal Reserve 13(3) Facilities (enumerated facilities and key features) - Primary Dealer Credit Facility: Loans to primary dealers for up to 90 days, backed by a wide range of margin-adjusted collateral (including Treasury and agency debt, investment grade corporate debt, international agency securities, commercial paper, municipal bonds, mortgage and asset-backed securities, and equities). - Money Market Mutual Fund Facility: Loans to depository institutions, bank holding companies and branches of foreign banks for up to 12 months collateralized by assets (including Treasury and agency securities, asset-backed commercial paper, unsecured commercial paper, certificates of deposit, short-term municipal debt) that are purchased by the borrower from money market funds. - The Primary / Secondary Market Corporate Credit Facility: Primary / secondary market purchases of corporate bonds, syndicated loans, or corporate bond ETFs for issuers that were investment grade on March 22. The secondary market facility SMCCF will aim to create a corporate bond portfolio that is based on a broad, diversified market index of U.S. corporate bonds. - Commercial Paper Funding Facility: Secondary market purchases of three-month commercial paper (including municipal and issuers with a foreign parent). - The Term Asset-Backed Securities Loan Facility: Loans to holders of highly-rated asset-backed securities containing auto or student loans, credit card receivables, equipment loans, leveraged loans, or commercial mortgages. - The Municipal Liquidity Facility: Purchase of notes issued by states and qualifying counties and cities with maturities of less than 24 months. - Paycheck Protection Program (PPP) Liquidity Facility: Provision of term financing to depository institutions that providing PPP loans. - Main Street Lending Programs: Purchase of existing or new bank loans, with maturities up to 4 years, to firms with up to 10,000 workers or with annual revenues of less than US$2.5 billion. Banks initiating the loans will retain a 5 percent share in the loan, and firms participating in the program will be subject to certain conditions (e.g., they must make reasonable efforts to retain workers, not use the loans for early repayment of other debts, and meet the limits on executive compensation, stock buybacks, and payment of dividends). A separate facility will provide funding to certain nonprofits. - Note: Several facilities were structured as a special purpose vehicle (SPV) funded by loans from the Federal Reserve and capitalized by Treasury resources. ### Fiscal actions: scope, cost, and near-term effects - Congress enacted four rounds of legislation in March and April to provide assistance to households, businesses and state and local governments. - Compared to other advanced economies, the U.S. legislated larger temporary direct support, including enhanced unemployment benefits and cash transfers, reflecting a traditionally smaller U.S. social safety net. - Fiscal cost and public finances: - The federal government primary deficit is expected to rise from around 3 percent of GDP in FY2019 to 16 percent of GDP in FY2020. - Federal debt is expected to rise steeply, to close to 100 percent of GDP by end-2020. - Under current policies, the path for debt-GDP is expected to continue increasing over the medium-term. - State and local government deficits are expected to more than double in size this year. - Economic effects of fiscal measures: - The fiscal package provided essential “life support” for the U.S. economy and increased the incentive for individuals to adhere to stay-at-home orders. - Measures aimed to preserve employer-employee relationships and prevent corporate bankruptcies, cushioning the macroeconomic impact and lessening lasting economic scars. - Fiscal packages supported healthcare providers and provided temporary breathing space to state and local governments. - Direct cash payments, expanded unemployment benefits, and food assistance protected household income, contained the overall increase in poverty rates, and allowed families to adhere to stay-at-home orders without facing significant economic hardship. - Parolin and others (2020) note that, in the absence of the CARES Act, poverty rates would have risen to 16.3 percent in 2020; income transfers in the CARES Act have the potential to maintain poverty rates at pre-crisis levels. ### Box 5 — Key fiscal measures (selected items and amounts) - Cash payments: US$1,200 per adult (plus US$500 per child) for those with gross annual income of less than US$75,000 (US$150,000 for a couple filing jointly), after which the benefit is reduced by 5 percent for those earning income in excess of that limit. - Enhanced/expanded unemployment benefits: - Duration of benefits extended to 39 weeks with a supplemental payment of US$600 per week paid until end-July 2020. - The supplement resulted in 5 out of 6 workers receiving benefits in excess of their previous earnings (for the median workers benefits amount to 134 percent of earnings). - Assistance to severely distressed sectors: - US$29 billion provided to support airlines (include grants and loans). - US$17 billion of direct loans or guarantees for businesses critical to national security. - US$454 billion appropriated to backstop the Section 13(3) Federal Reserve facilities described above. - Paycheck Protection Program: SBA loans and guarantees to companies with up to 500 employees; loans eligible for partial or total forgiveness depending on maintenance of pre-crisis payroll. - Employee retention tax credit: Equals to 50 percent of the qualified wage paid by eligible employers through end 2020 with a cap of $5,000 per employee. - Transfers to subnational governments: US$150 billion. - Healthcare appropriations: US$175 billion to hospitals and measures to address medical supply shortages, fund COVID-19 testing, and expand telehealth services. - SDR28 billion for the IMF’s New Arrangement to Borrow. ### Outlook and risks to the recovery (projections and uncertainties) - Baseline GDP path: - Following a rebound in activity in the second half of the year, GDP is projected to end 2020 around 6½-7 percent below end-2019 levels, recovering a further 4 percent in 2021. - GDP is expected to steadily rise in the years ahead but, by 2025, would remain 4-5 percent below the level of activity that was expected pre-pandemic. - Output gap and potential GDP: - Staff view that COVID-19 has had an immediate impact on the level of potential GDP as full capacity in various sectors has diminished relative to the pre-pandemic period. - In staff’s baseline it is assumed that the constraints on safe activity in a range of in-person services will remain binding for some time. - Principal risks: - A resurgence in COVID-19 cases could lead to a renewed, partial shutdown of the economy. - Recent increases in infection rates were already leading to a slowdown or partial reversal of reopening decisions in some states. - Uncertainties about policy changes (e.g., reopening of schools, resumption of cross-border travel and immigration) could materially affect the pandemic path and recovery. - Labor market and reallocation risks: - By June, 4.6 million workers had left the labor force. - Hysteresis effects suggest it will take time for many workers to return to active job search or employment. - The drop in demand could lead to a wave of corporate bankruptcies and require significant reallocation of capital and labor, with frictions that will slow the recovery. - Pervasive excess capacity is likely to dampen prospects for new investment in many sectors. - Policy contingencies: - Staff’s outlook does not incorporate any future monetary or fiscal policy stimulus beyond that already in place, nor does it assume a vaccine discovery is imminent. - Additional policy efforts to stimulate demand or rapid progress on vaccines or therapeutics would have important effects in accelerating the pace of recovery. - The U.S. economy’s flexibility, talent, and human capital could foster innovations that drive a revival in productivity and investment and (at least temporarily) boost potential growth. *International Monetary Fund — Chapter excerpt* ### 24. The very large amount of slack in the economy increases the risk of an extended ### 1usaea2020001 - 24. The very large amount of slack in the economy increases the risk of an extended ### Inflation risk and demand slack - Large slack in the economy increases the risk of an extended period of low, or even negative, inflation. - Persistently high levels of unemployment are likely to put downward pressure on wages. - Global excess capacity in tradable goods and commodities is likely to present a source of imported disinflation. - Countervailing cost pressures (e.g., re-shoring production, adaptations for customer safety) are likely to manifest as shifts in relative prices but not through a generalized upswing in core or headline inflation. - If inflation remains low, or even negative, for an extended period: - This would mute the impact of monetary policy loosening (given the effective lower bound). - Businesses and consumers could delay purchases, further weakening demand. - Disinflation would be particularly problematic given the expected increase in public, household, and corporate indebtedness, potentially giving rise to balance sheet stress and necessitating debt write-downs by creditors. - Measurement caution: concerns exist that inflation may be improperly measured due to rapid changes in the consumption bundle, disappearing goods, and sharp changes in quality of goods. ### Poverty, distributional impacts, and labor market - There are urgent warning signs that the depth of the contraction and sectoral distribution of losses will lead to a systemic increase in poverty and longer-term risks to growth. - Poverty rates were already high prior to the pandemic relative to other advanced economies, with important racial dimensions: African Americans and Hispanics are more likely than White households to be in poverty, unemployed, and without health insurance. - The loss of income in the second quarter has been particularly incident on lower income workers. - Near-term mitigation: supplemental unemployment insurance and economic impact payments will help lower income households in the near term. - Projections and risks: - Over the next year or two, the poverty rate is likely to spike above levels reached during the global financial crisis (a period when the official poverty rate rose above 15 percent, levels last seen in the mid-1960s). - Even under staff’s baseline projection, the median household’s disposable income could take several years to recover to its 2019 levels. - Historical context: following the 2008-9 recession, real GDP fell peak-to-trough by 4 percent and returned to pre-recession levels within 3 years; despite this, real median household income fell by over 8 percent and took nine years to recover. - Risks from elevated poverty: - Further weakening of demand. - Exacerbation of longer-term headwinds to growth through prevented human capital accumulation, eroded labor force participation, or social unrest. ### Debt accumulation and financial vulnerabilities - The fiscal response to the pandemic already put in place is expected to lead general government debt to rise to 160 percent of GDP by 2030. - Debt will go even higher if further fiscal stimulus is put in place. - Household effects: job losses will lead to increased household indebtedness and balance sheet strains likely to manifest as increased foreclosures and personal bankruptcies. - Corporate sector: - Corporate debt has increased above already-high pre-pandemic levels as firms drew on credit lines and issued new debt to build cash buffers. - Low or negative inflation, the need for significant resource reallocation across sectors, and a slow return of corporate earnings to pre-pandemic levels will combine to cause corporate failures to rise. - Market vulnerabilities: equity and bond market valuations appear stretched, leaving the economy vulnerable to new bouts of market volatility and potential future tightening of financial conditions. ### State and local government stresses - State and local governments have borne the bulk of public health interventions, shifted education online, and provided social assistance and unemployment insurance. - Sales tax revenues have plummeted. - Consequence: state and local finances have shifted from close to primary balance to an expected deficit of 2-3 percent of GDP in 2020. - Fiscal constraints: - Aside from Vermont, state governments face balanced budget requirements, leading some states to cyclically cut spending. - Downside risks from subnational fiscal tightening in 2020-21: - Macro: would constitute an important headwind to federal efforts to boost activity. - Distributional: two-thirds of state and local outlays are social assistance, health and education—spending cuts will disproportionately impact low income households and the unemployed when they most need support. ### Authorities' views - Authorities recognized extraordinary uncertainty but were confident that Q3 and Q4 would record historically high growth and significant employment gains. - Officials believed phased reopening, public health efforts, and policy support to households, firms, and state and local governments would position the economy for revival. - They noted support packages were designed progressively, providing more resources to lower income groups and maintaining household liquidity. - Principal risk acknowledged: resurgence in COVID-19 infections, mitigated by expanded testing and ongoing development of therapeutics and vaccines. - Authorities saw little risk of another economy-wide shutdown given improvements in public health preparedness. - While recognizing increased public debt as a vulnerability, authorities were confident the U.S. could support such debt levels, reflected in market pricing of sovereign risk. ### Corporate sector liquidity and solvency prospects (Box 6) - Stress test sample: 750 U.S. firms accounting for two-thirds of total corporate borrowing; staff mapped baseline forecasts into sectoral revenue losses across 18 sectors to project liquidity (net cash) and solvency (net equity). - Liquidity challenges: - Among firms investment-grade as of March 22, 2020, the largest liquidity needs arise from operating losses and debt rollover needs of the energy sector. - Energy sector outstanding debt: US$580 billion (or 10 percent of investment grade loans and bonds). - Energy firms account for almost 70 percent of corporate liquidity needs through end-2020. - If energy firms are unable to issue new debt, over 80 percent of the outstanding debt stock in the sector would hit a binding liquidity constraint by year-end and be unable to meet obligations. - Estimated liquidity needs in other sectors amount to between US$290-619 billion by end-2020 (depending on firms’ pre-crisis investment levels). - Solvency risks: - Around 15 percent of the debt of non-investment grade, non-energy firms (or US$485 billion in total borrowing) are predicted to have negative equity by end-2020. - These firms are mostly concentrated in entertainment, technology, and transportation industries and are likely to enter bankruptcy proceedings. - Debt issuance needs in 2020 by remaining solvent, high-yield firms are relatively modest (between US$90-140 billion depending on the level of investment spending). - Aggregate cash need charts indicate sectoral timing and magnitudes for IG and HY firms (data visualizations described in text). ### The future direction of fiscal policy — overall guidance and size - Priority: design and build a political consensus around a fiscal package to accelerate post COVID-19 recovery. - Immediate funding for the health response should continue. - Given the severity of the crisis and relatively small automatic stabilizers in the U.S., a new fiscal package should be legislated in the next few months with substantive, discretionary policy actions sustained over coming years until recovery is well-established and the output gap has been significantly narrowed. - The fiscal package should simultaneously: - Address deep-rooted social and economic challenges in the U.S. - Address environmental concerns. - De-escalate trade conflicts. - Meet challenges and opportunities from accelerated digitalization. - Size of the package: - Model-based analysis suggests under staff’s current baseline the appropriate additional fiscal package could be in the order of 10½ percent of GDP over the next three years. - If downside risks materialize, needed fiscal actions would have to be proportionally larger: a 1 percent of GDP increase in the end-2020 output gap would add about 1½ percent of GDP to the size of the desired fiscal package over the next three years. - Implication: policymakers must remain agile and adjust the size and composition of fiscal response as economic and public health conditions change. - Warning: an insufficiently ambitious fiscal response risks leaving an unbalanced policy mix that places excessive burden on monetary policy. ### Policy recommendations — tax, social assistance, health, and labor-market measures - A. Tax policies - Increase personal income tax credits targeted toward the most vulnerable: - Increase generosity of, and eligibility for, the Earned Income Tax Credit (especially for childless workers). - Raise the child tax credit (making it fully refundable up to a specific income level). - Consider targeted credits for job training or relocation expenses to aid displaced workers. - Front-load support and consider advanced payments of these credits (with careful administration to avoid fraud or misallocation). - Convert business tax to a full cash flow tax to ease firms’ cashflow needs, simplify the tax system, and incentivize investment: - All new capital investments would be immediately expensed. - Make temporary expensing provisions permanent and expand to ensure all new investments could be immediately expensed (building on 2017 reform that resulted in around 80 percent of total investment being expensed). - Deductibility of interest costs associated with financing such investments could be gradually phased out to lessen debt bias. - Tax benefit for new investments could be creditable against other tax obligations or refundable to increase liquidity benefits for firms with limited income or taxable losses. - Gradually phasing-out interest deductions would provide a temporary net subsidy to returns on new investments. - Considerations to “border adjust” a destination-based cashflow tax must account for WTO compatibility and outward spillover effects, including exchange rate adjustments and implications for other jurisdictions’ corporate tax systems. - B. Tackling poverty and supporting displaced workers - Complement tax credits with a permanent expansion in eligibility for, and size of, social assistance. - Measures to mitigate racial inequities (though only a partial step in addressing complex socioeconomic issues). - Focused policies: - Increased funding for the Supplemental Nutrition Assistance Program and temporary suspension of attached work requirements. - Consider increasing direct cash aid to poor families (e.g., through Temporary Assistance for Needy Families). - Temporarily expand the Section 8 housing voucher program to help poor families cover rent. - Health system measures - The pandemic highlights weaknesses in the U.S. decentralized and fragmented health system: employer-provided insurance predominates and 25.6 million Americans lack health coverage. - Immediate concern: families losing employer-provided insurance upon unemployment, raising uninsured counts. - Policy options: - Preserve employer-employee relations to mitigate loss of coverage. - Ensure health programs for low income families (Medicaid and Child Health Insurance Program) can meet increased demand. - Consider temporarily increasing the federal share of Medicaid spending (noting Family First Coronavirus Response Act increased the FMAP by 6.2 percentage points during the COVID19 emergency, below the 12 percent increase during the Global Financial Crisis). - Introduce incentives for states to expand Medicaid and/or raise income limits for Medicaid eligibility. - States could launch campaigns to increase awareness of available health insurance options to widen coverage among low income and vulnerable groups. - Context: Medicaid expansion was intended to be national but the June 2012 Supreme Court ruling effectively made it optional; if the 14 states that have not yet adopted the Medicaid expansion do so, an estimated 2.8 million uninsured adults would have access to Medicaid coverage in 2021. *International Monetary Fund — UNITED STATES chapter content as provided* ### Box 7. Potential Size of the Needed Fiscal Stimulus—A Buffer-Stock Model Approach ### Box 7. Potential Size of the Needed Fiscal Stimulus—A Buffer-Stock Model Approach ### Model structure and calibration - Stochastic structural “Buffer-Stock” model calibrated to the U.S. economy. - Fiscal policy constraints and effects modeled: - Implementation lags in fiscal policy. - Fiscal expansion erodes buffers, leading to higher borrowing costs. - Up-front stimulus reduces hysteresis effects (decline in labor force participation; depreciation of human and physical capital). - Fiscal multiplier: - Set between 0.6 and 1 when the economy is in equilibrium. - State contingent, increasing to above 1 at the bottom of the cycle. - Fiscal reaction parameters: - The primary balance deteriorates by 0.35 percent of GDP for each 1 percent fall in GDP. - Interest rates increase by 0.5 basis points for each 1 percent increase in the debt-to-GDP ratio. - Debt and market access: - Debt level triggering risk of loss of market access and prompting consolidation set at 200 percent of GDP. - Potential output adjustments include continued health concerns preventing certain businesses from operating at full capacity in 2021. ### Key model findings and baseline recommendations - Recommended cumulative fiscal stimulus: - About 10½ percent of GDP through 2023 to restore the economy quickly to full employment. - Under current policies (without additional stimulus): - Structural primary general government balance would tighten substantially in the second half of 2020 as most CARES Act measures phase out. - Output gap would be about 5 percent in 2020 and 1.7 percent in 2021. - Policy objective guiding calibration: - Given historically low borrowing costs and strong demand for U.S. Treasuries, bringing activity back to potential as quickly as possible is prioritized. - The model recommends a fiscal path that brings the economy to full employment by 2022. - Debt implications of the recommended path: - General government debt would rise to about 155 percent of GDP by 2023. ### Sensitivity and scenario analysis - Sensitivities: - If multipliers or the interest rate elasticity to debt-GDP were larger, less stimulus would be needed. - If the output gap starts 1 percent of GDP larger than in the baseline forecast, the recommended cumulative stimulus over three years would be 1.5 percent of GDP higher. - Scenario with vaccine: - In the event of a vaccine for COVID-19, the economy would be able to quickly operate at higher levels of capacity utilization and the optimal stimulus would be significantly larger. *Source: Box 7. Potential Size of the Needed Fiscal Stimulus—A Buffer-Stock Model Approach* ### 44. Authorities’ views. The authorities recognized that the U.S. would have to put in place ### 1usaea2020001 - 44. Authorities’ views. The authorities recognized that the U.S. would have to put in place ### Authorities’ views on fiscal support and program design - Authorities recognized the U.S. would have to put in place further fiscal stimulus to accelerate the recovery. - Support for providing more help to small businesses, to incentivize investment, encourage companies to rehire, and to facilitate workers’ return to work (including potentially through a re-employment bonus). - Authorities argued that maintaining healthcare coverage would be best-achieved by ensuring that individuals were able to preserve employer-employee relationships. - Precise policy contours would need to be designed by the Congress, in consultation with the administration. - Authorities underlined the significant fiscal space that the U.S. continues to have, even after the historically unprecedented tax and spending decisions taken over the past few months, and that policy support could be sustained for several years, if needed. - Concern that assistance to state and local governments should not provide a bail-out to states that had pursued poor policies in the past; any resulting contraction in subnational fiscal demand could be offset by further stimulus in other sectors. - Administration committed to high levels of transparency and accountability in deployment of public monies; significant information already provided balancing oversight and protection of borrowers’ proprietary information. ### Options for additional monetary stimulus — overview - Fed had taken extraordinary actions to support the economy and maintain the smooth functioning of financial markets. - Fed’s own forecasts anticipate both inflation and employment will remain below medium-term goals for the next several years, creating risk of longer-term damage and downward de-anchoring of inflation expectations. - Need to strengthen monetary support in coming months to more quickly bring the economy back to maximum employment and 2 percent inflation. - Additional monetary support would complement fiscal measures and have positive spillovers globally, but would likely increase incentives for financial risk taking, increased leverage, and a shift of resources toward more risky activities. ### A. Asset Purchase Programs - Empirical evidence: Between 2009 and 2014, the Fed purchased US$2 trillion in Treasury securities, estimated to have lowered 10-year Treasury yields by around 100 basis points (range of estimates exists; evidence of diminishing returns with each round). - Downsides of a very large balance sheet over extended horizon: - Potential for mark-to-market losses on a relatively long duration portfolio. - If rate on excess reserves rises above average return on asset holdings, reduction in net income position. - Significant increase in asset holdings could adversely affect trading volume and increase political pressure to maintain purchases. - Could encourage greater risk-taking and excessive leverage, amplifying financial stability risks. - Exiting an expanded program must be handled carefully (reference to the “taper tantrum”). - Assessment: There appears to be scope to further scale up purchases of Treasury bonds and MBS to provide greater monetary stimulus, but with short-term rates at the effective lower bound for several years, effects likely relatively modest. ### B. Forward Guidance - Few downsides to strengthening forward guidance; potential reputational risks if commitments become difficult to carry through. - Possible commitments: - Maintain policy rate at lower bound at least until core or headline PCE inflation rises above 2 percent for a sustained period, explicitly aiming to temporarily overshoot medium-term inflation goal. - Temporary price level targeting as an alternative. - Complementary communication tools: - Replace or supplement the Summary of Economic Projections with a quarterly, internally-consistent economic projection endorsed by the FOMC, including description of risks and alternative quantified scenarios. - Provide greater clarity on planned size of future asset purchases and, in time, give clear and early guidance on balance sheet normalization. ### C. Yield Curve Control - Yield curve control could strengthen forward guidance and help prevent premature shifts in expectations. - Downsides: - Given size and global nature of the Treasury market, enforcing yield targets could require very large purchases, increasing risks to the Fed’s balance sheet (rising with duration). - Limited empirical evidence on extent to which yield curve control boosts demand, especially when yields already at historic lows. - Capping yields will dampen price signals Treasury markets provide (at least at shorter maturities). - Targeted approach: - Yield curve control focused on short-to-medium part of the curve could complement forward guidance. - Example: FOMC commit not to raise rates until PCE inflation rises above 2 percent; cap interest rates at zero at maturities at least until horizon where FOMC-endorsed forecast of PCE inflation rises above 2 percent; revisit parameters quarterly. - Expected effect: Incremental stimulus likely relatively modest; main effect to strengthen forward guidance and provide insurance yields remain aligned with guidance. ### D. Negative Interest Rates - Federal funds target range is 0 to ¼ percent; Fed could target a negative policy rate as other central banks have. - Potential benefits: Lower rates across yield curve and strengthen forward guidance, stimulating demand. - Risks and constraints: - If banks unable to pass negative rates to depositors, negative rates could worsen bank profitability and reduce lending. - Tiering (exempting portion of reserves from negative rate) could cushion impact on bank profitability. - Steps may be needed to forestall wholesale cash hoarding by financial firms, insurance companies, and pension funds to increase effectiveness. - U.S. banks are more reliant on deposit funding than European or Japanese banks, which could dissipate or reverse stimulative effects. - Negative rates would reduce profitability of money market mutual funds and could trigger significant withdrawals; funds may shift to riskier, higher yielding assets, posing market functioning and financial stability risks. - Assessment: On balance, risk-reward trade-off does not favor introduction of negative policy rates in the U.S.; effects on activity and inflation likely small and highly uncertain. ### E. Expanded Lending or Increased Purchases of Marketable Securities - Size and duration of existing credit and loan facilities could be expanded; many slated to terminate over next 3-6 months. - So far, various facilities (excluding central bank swap lines) have been well below announced size; only around one-half of the US$454 billion appropriated by Congress as a backstop for these facilities has been committed so far. - Risks of expansion: - Increased Fed footprint in allocation of credit; Fed would determine eligibility for purchase programs, creating controversy, political scrutiny, and potential undermining of Fed independence and reputation. - Scaling up purchases could result in loss of market functioning as Fed becomes significant buy-and-hold investor. - Recommendation: Direct lending and purchase of marketable securities should continue for emergency liquidity support but not be relied on to provide demand stimulus; if further credit or guarantees are needed, such activities should be undertaken by the Treasury rather than the Federal Reserve. ### Authorities’ views on monetary options - Federal Reserve actively considering a range of further policy options if needed to counter pandemic effects. - Policymakers had significant ammunition; no limit to amount of liquidity Fed could provide to financial markets. - Strong FOMC commitment to do everything necessary to support the economy for as long as needed. - Fed ready to use full range of tools—including asset purchases and changes to forward guidance—but did not regard negative interest rates as appropriate or useful for the U.S. - No decision yet on yield curve control; discussions at an early stage. - FOMC intended to return to completion of its monetary policy framework review, potentially revising its Statement on Longer-Run Goals and Monetary Policy Strategy. - Expectation that various 13(3) interventions would expire gradually in coming months as previously announced; take-up of facilities to depend on broader economic trajectory. ### Financial system oversight — resilience and vulnerabilities - U.S. financial system shown to be resilient and flexible in real-time stress. - Banks entered crisis with sizable capital and liquidity buffers; nonbanks and capital markets largely absorbed unprecedented portfolio shifts. - Ongoing recession, rise in corporate leverage, and migration of risks to nonbank financial institutions could result in severe financial strain. - Stress-test findings (FSSA): - Banks’ capital depletion rates expected to be large but manageable. - Stress tests found that, even in a downside scenario—relative to already-stressed baseline—banks would need a relatively small amount of incremental capital: 1.7 percent of GDP over a three year horizon to meet Tier-1 common equity regulatory requirements; these needs could largely be met from a temporary suspension of shareholder payouts. - Under severe assumptions (40 percent drawdown of credit and liquidity lines, and closure of repo markets), only one GSIB would be unable to fund its cash needs for 30 days. - Systemic financial stability concerns have been relatively muted due to rapid Fed emergency support and temporary regulatory carve-outs. ### Actions on bank capital distributions and suggested tightening - Federal Reserve prohibited share buybacks and limited dividend payments by banks: - Did not object to banks’ capital plans but suspended share repurchases and capped dividends (to be below the bank’s income over the preceding four quarters). - Restrictions applicable for the third quarter and may be extended on a quarter-by-quarter basis. - Banks must re-assess capital needs and resubmit capital plans later in the year. - Recommendation: More stringent actions needed to preserve strong capital buffers: - Tighter limits on dividend distributions. - Re-evaluation of differential treatment of buybacks and dividend payments. - Extend binding period for these measures into 2021. ### Institutional and macroprudential recommendations - Institutional changes to strengthen systemic oversight and reduce vulnerabilities: - Provide an explicit financial stability mandate to all federal FSOC members and intensify FSOC crisis preparedness efforts. - Develop macroprudential tools to manage systemic risks in nonbanks; FSOC should direct members to work together on this issue. - Increase independence of the Commodity Futures Trading Commission and Securities and Exchange Commission to determine their own resources (rather than as part of annual appropriations). - Increase CFTC resources devoted to supervision of central counterparties, make risk management requirements consistent across these entities, and execute more comprehensive systemwide stress tests of central counterparties. - Within state-level insurance regulation, increase independence of state insurance regulators, gradually transition to principles-based reserving for insurers, and develop a consolidated group capital requirement consistent with international practice. - Develop plans to ensure market functioning is preserved if the Bank of New York Mellon becomes unable to settle and clear repo transactions. - Permit provision of bilateral emergency liquidity assistance to systemically important nonbanks. *Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1usaea2020001.pdf* ### 62. There are also some aspects of the supervisory and regulatory framework that could ### 1usaea2020001 - 62. There are also some aspects of the supervisory and regulatory framework that could ### Supervisory and regulatory framework: findings and recommendations - The most salient aspects of prudential guidance for banks could be reformulated as regulation. - Following recent tailoring of regulations, prudential requirements for non-internationally active banks should be reviewed to ensure they are, and continue to be, broadly consistent with the Basel capital framework and appropriate liquidity and concentration limits. - Liquidity stress testing could be applied by the SEC to money market funds. - The federal banking agencies should encourage banks to explicitly allow for the use of the discount window in their short-term liquidity planning (allowing Treasuries and bank reserves to be fully fungible). - There is a continuing need to address data gaps to provide financial regulators with a fuller picture of the entire financial system and the interconnections between institutions and markets. ### Data gaps and reporting: findings and proposals - Data gathering on bilateral repo, triparty repo, securities lending, and asset management is at early stages. - The trade reporting and compliance engine (TRACE) pilot for data reporting on Treasury securities should be a permanent feature of the system. - To build a clear view of interconnections, data on interbank exposures should be expanded from the six U.S. GSIBS to a fuller sample of banks. - Data is needed to provide a better picture of: - the holdings of collateralized loan obligations; - institutions’ direct and indirect exposures to leveraged and private loans; - the various channels that connect nonbanks with the rest of the system. ### Authorities’ views (financial stability and supervisory posture) - The U.S. financial system entered the current crisis in a strong position and has handled well the upheaval experienced over the past few months. - The U.S. authorities reacted quickly with a number of significant actions, such as liquidity facilities available to banks and nonbanks. - Authorities would continue to carefully scrutinize developments, including in levels of leverage and credit quality in the months ahead. - The policy actions taken to mitigate financial market disruptions and support the economy had led to much-improved financial conditions; however, market conditions remain fragile and require continued support. - Clear communications will help mitigate the risk of market participants becoming complacent. - Authorities were carefully considering the recommendations of the FSAP and were continuing to work to strengthen the institutional framework for financial stability, which remains advanced in implementing the G-20 financial regulatory reforms and meeting international standards. - They will continue to review regulation and supervision to maintain safety and soundness of the U.S. financial system while calibrating requirements to the level of risk posed. ### Trade policy: findings and recommendations - The crisis underscores the importance of open trade for the U.S. and global economies. - As the pandemic spread, the U.S. avoided the use of trade restrictions on critical health products and food. - The U.S. still maintains the bulk of the trade restrictions and tariffs that were imposed in 2018-19 and U.S. exports continue to be adversely affected by similar measures taken by trading partners. - The U.S. decision to block appointments to the WTO Appellate Body will detract from the enforceability of WTO legal rulings and could weaken other members’ adherence to WTO obligations. - Authorities should work actively with others on WTO reform to address important gaps in WTO rules. - Efforts should be made to reverse trade restrictions and tariff increases while working with partner countries (through both bilateral channels and the WTO) to address the policies that distort trade flows and investment decisions. - The application of countervailing duties on imports from countries that the Department of Commerce finds to have an undervalued currency could potentially escalate trade tensions and have negative spillovers for other countries. - Treating currency undervaluation as a subsidy to be countervailed raises concerns in both the finance and trade spheres. - The threat of trade penalties could potentially impinge on monetary policy decisions and discourage exchange rate flexibility. - Other countries might pursue a similar policy with their own standards and methodologies, potentially broadening the use of trade restrictions. ### Governance and transparency: findings and gaps - The U.S. is substantially effective at investigating and prosecuting money laundering and cooperating with other jurisdictions over corruption proceeds in the U.S. - Since last year’s consultation the U.S. has improved its compliance on customer due diligence by requiring all covered FIs to collect and verify beneficial ownership information for companies and some trusts that are customers. - Serious shortcomings remain related to entity transparency and the content and coverage of preventive measures, including in relation to identifying politically exposed persons. - Measures should be further strengthened to: - facilitate timely access to beneficial ownership information of all customer types and to obtain such information about companies upon formation; - 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, where real estate agents are not subject to comprehensive AML/CFT requirements and where non-bank mortgage lenders and originators have limited awareness of obligations, especially with regard to politically exposed persons. ### Staff appraisal: macroeconomic, social, and financial assessment and recommendations - Pandemic and macroeconomic impact: - The longest expansion in U.S. history has been derailed by the unanticipated advent of COVID-19. - To preserve lives and support public health, a broad-based shutdown of the U.S. economy was necessary in March. - As of July 16, more than 136,000 Americans have tragically lost their lives and many more have become seriously ill. - Almost fifteen million Americans have lost their jobs. - Reopening decisions will have to be handled carefully to mitigate economic costs while containing ongoing rises in COVID-19 infection rates. - It will likely take a prolonged period to repair the economy and to return activity to pre-pandemic levels. - Distributional and structural concerns: - The poorest households face a particularly precarious situation; the economic costs of the crisis are being borne disproportionately by the poor and vulnerable. - The pandemic has underscored structural shortcomings of the U.S. health system (fragmented, decentralized, predominantly employer-based, at high cost, and with a significant share of low-income households lacking coverage). - Labor-intensive, face-to-face services (which tend to employ a large share of lower-income workers) face particularly large strains; unemployment among lower income households is expected to remain high for a protracted period. - Poverty rates and other social strains are expected to exceed those experienced after the global financial crisis. - Policy response and recommendations: - U.S. policymakers acted quickly and assertively: the Federal Reserve provided unprecedented monetary stimulus and liquidity support; fiscal measures assisted small businesses and sectors, increased resources to healthcare providers, expanded unemployment insurance, created incentives to retain workers, transferred cash directly to households, and provided resources to state and local governments. - Further policy efforts will be needed to counter the pandemic and address deep-rooted social and economic challenges (poverty; inequalities of opportunity; declining socioeconomic mobility; polarized income distribution; barriers to trade and foreign investment; and unsustainable public debt). - A further round of fiscal measures in the coming months should boost demand, increase health preparedness, and support the most vulnerable. - The U.S. has some fiscal space and it should be deployed quickly to hasten the recovery from the second quarter contraction, permanently improve the social safety net, and facilitate a broader remaking of the U.S. economy. - Efforts are needed to prepare for future health crises (or a resurgence in COVID-19) and ensure that those without medical insurance have access to affordable, quality health care. - Monetary policy options: - Asset purchases could be scaled up to increase policy stimulus. - The Federal Reserve could adapt its forward guidance to more firmly anchor market expectations about the future path for policy. - Begin shaping Fed communications around an internally-consistent economic projection endorsed by the FOMC with alternative, quantified scenarios showing the range of risks around the baseline. - These actions could potentially be supported by introduction of yield curve control. - Current credit facilities should be regarded as unusual and exigent tools and should be phased-out (as planned). - The risk-reward trade-off does not appear to favor the introduction of negative policy rates in the U.S. context. - Trade policy: efforts should be made to reverse existing trade restrictions and tariff increases while working with partner countries to address policies that distort trade flows and investment decisions. - External position and outlook: - The external position was moderately weaker than the level implied by medium-term fundamentals and desirable policies in 2019. - An increase in private sector saving and a decline in investment is expected to offset the increased fiscal deficit, implying a current account deficit of around 2 percent of GDP in the coming years, though there is significant uncertainty surrounding this forecast. - Financial system resilience and regulatory priorities: - The real-time economic and financial stress test over the past few months has shown the U.S. financial system to be both resilient and flexible. - The system experienced important liquidity problems early in the crisis but these were quickly resolved by the Federal Reserve. - Banks entered the current crisis with sizable capital and liquidity buffers and nonbanks and capital markets have largely absorbed unprecedented portfolio shifts. - Deteriorating credit quality of household and corporate lending is likely to become increasingly visible in coming months, arguing for continued restraint on banks’ capital distribution plans. - FSAP priorities include: - introducing an explicit financial stability mandate for the principal regulators; - increasing the budgetary independence of the Commodity Futures Trading Commission, Securities and Exchange Commission, and state-level insurance regulators; - developing macroprudential policies to mitigate growing vulnerabilities outside the core banking system; - intensifying the crisis preparedness function of the Financial Stability Oversight Council; - improving risk management and stress testing of central counterparties; - transitioning to principles-based reserving and developing consolidated group capital requirements for insurers; - reviewing prudential requirements for non-internationally active banks to ensure consistency with the Basel capital framework and appropriate liquidity and concentration limits; - allowing banks to assume full access to the discount window as part of liquidity planning (allowing Treasuries and bank reserves to be fully fungible); - sustained efforts to address important data gaps that obscure regulators’ visibility on systemic interconnections and vulnerabilities. *United States — International Monetary Fund (excerpt).* ### 79. It is recommended that the next Article IV consultation take place on the standard ### 1usaea2020001 - 79. It is recommended that the next Article IV consultation take place on the standard ### Summary and recommendation - It is recommended that the next Article IV consultation take place on the standard 12-month cycle. ### Selected economic indicators and IMF staff projections (highlights) - U.S. real GDP (percent change): 2018: 2.9; 2019: 2.3; 2020: -6.6; 2021: 3.9; 2022: 3.3; 2023: 2.3; 2024: 1.9; 2025: 1.8. - Unemployment rate: 2018: 3.9; 2019: 3.7; 2020: 9.2; 2021: 8.1; 2022: 6.3; 2023: 5.0; 2024: 4.3; 2025: 4.2. - CPI inflation (q4/q4): 2018: 2.2; 2019: 2.0; 2020: 0.9; 2021: 2.4; 2022: 2.3; 2023: 2.3; 2024: 2.2; 2025: 2.2. - Core PCE Inflation (q4/q4): 2018: 1.9; 2019: 1.6; 2020: 0.8; 2021: 1.8; 2022: 1.9; 2023: 1.9; 2024: 1.9; 2025: 1.9. - Federal balance (% of GDP): 2018: -3.8; 2019: -4.6; 2020: -18.0; 2021: -10.4; 2022: -5.4; 2023: -4.5; 2024: -4.7; 2025: -4.9. - Federal debt held by the public (% of GDP): 2018: 77.4; 2019: 79.3; 2020: 99.6; 2021: 107.4; 2022: 106.8; 2023: 106.8; 2024: 107.4; 2025: 108.3. - Current account balance (% of GDP): 2018: -2.1; 2019: -2.2; 2020: -2.2; 2021: -2.1; 2022: -2.1; 2023: -2.1; 2024: -2.0; 2025: -2.0. - Net international investment position (% of GDP): 2018: -47.0; 2019: -51.6; 2020: -61.2; 2021: -59.8; 2022: -58.8; 2023: -58.5; 2024: -58.3; 2025: -58.2. - Personal saving rate (% of disposable income): 2018: 7.7; 2019: 7.9; 2020: 16.2; 2021: 11.2; 2022: 8.4; 2023: 7.8; 2024: 7.8; 2025: 7.8. ### Balance of payments and external flows (highlights from Table 2) - Real exports growth (goods and services): 2018: 3.0; 2019: 0.0; 2020: -10.8; 2021: 6.7; 2022: 4.7; 2023: 4.0; 2024: 2.8; 2025: 2.4. - Real imports growth (goods and services): 2018: 4.4; 2019: 1.0; 2020: -9.3; 2021: 6.7; 2022: 4.3; 2023: 3.5; 2024: 2.3; 2025: 2.1. - Current account balance (US$ billions): 2018: -450; 2019: -480; 2020: -436; 2021: -447; 2022: -478; 2023: -496; 2024: -500; 2025: -510. - Financial account balance (% of GDP): 2018: -2.0; 2019: -1.8; 2020: -2.2; 2021: -2.1; 2022: -2.1; 2023: -2.1; 2024: -2.0; 2025: -2.0. - Net International Investment Position (percent of GDP): 2019: -51.6; 2020: -61.2; 2021: -59.8; 2022: -58.8; 2023: -58.5; 2024: -58.3; 2025: -58.2. ### Fiscal outlook and public debt (highlights from Table 3) - Federal government revenue (% of GDP): 2018: 16.4; 2019: 16.3; 2020: 13.1; 2021: 15.2; 2022: 17.3; 2023: 17.5; 2024: 16.9; 2025: 17.0. - Federal government expenditure (% of GDP): 2018: 20.2; 2019: 21.0; 2020: 31.1; 2021: 25.6; 2022: 22.7; 2023: 22.0; 2024: 21.7; 2025: 21.9. - Federal debt held by the public (% of GDP) projections: 2026: 108.8; 2027: 109.0; 2028: 109.8; 2029: 109.9; 2030: 110.4. - General government gross debt (% of GDP): 2018: 107.1; 2019: 108.7; 2020: 138.2; 2021: 142.2; 2022: 142.8; 2023: 143.9; 2024: 145.3; 2025: 146.6. - IMF staff note: Fiscal projections are based on Congressional Budget Office forecast adjusted for the IMF staff’s policy and macroeconomic assumptions and incorporate effects of legislations in response to COVID-19 and prior tax reform. ### Core financial soundness indicators for deposit takers (selected) - Regulatory capital to risk-weighted assets: 2011: 14.7; 2012: 14.5; 2013: 14.4; 2014: 14.4; 2015: 14.1; 2016: 14.2; 2017: 14.5; 2018: 14.8; 2019: 14.7. - Non-performing loans to total gross loans: 2011: 3.8; 2012: 3.3; 2013: 2.5; 2014: 1.9; 2015: 1.5; 2016: 1.3; 2017: 1.1; 2018: 0.9; 2019: 0.9. - Return on assets: 2011: 0.3; 2012: 0.3; 2013: 0.4; 2014: 0.3; 2015: 0.4; 2016: 0.4; 2017: 0.3; 2018: 0.4; 2019: 0.4. - Liquid assets to total assets (liquid asset ratio): 2011: 12.7; 2012: 13.4; 2013: 14.5; 2014: 14.5; 2015: 13.2; 2016: 12.8; 2017: 13.2; 2018: 12.7; 2019: 11.7. ### External sector assessment (key findings and recommendations) - Overall assessment: The external position in 2019 was moderately weaker than the level implied by medium-term fundamentals and desirable policies in 2019. - Projection: Larger private-sector saving is expected to largely offset the 2020 fiscal packages, resulting in a relatively steady CA deficit in the coming years. - Recommended near-term policy responses to COVID-19 fallout: - Expand fiscal efforts to ease the burden of the shutdown on households and firms. - Once the immediate health crisis subsides, use fiscal space for a front-loaded package to: increase investment in infrastructure; facilitate the transition to a lower carbon economy; offer consumption subsidies to kick-start demand. - Medium-term fiscal recommendation: - Reinvigorate fiscal consolidation aimed at a medium-term general government primary surplus of about 3/4 percent of GDP to put the debt-GDP ratio on a downward path and address the CA gap. - Structural policy recommendations to increase competitiveness: - Upgrade infrastructure; enhance schooling, training and mobility of workers; support the working poor; increase growth in the labor force (including skill-based immigration reform). - Roll back tariff barriers and resolve trade and investment disagreements to support an open, stable, and transparent global trading system. - Foreign asset and liability position: - 2019 (% GDP): NIIP: -51.3; Gross Assets: 136.8; Debt Assets: 46.4; Gross Liab.: 188.1; Debt Liab.: 95.4. - Under staff’s baseline scenario, NIIP is projected to decline by about [2] percent of GDP through the medium term, on the back of sustained current account deficits. - Current account assessment: - 2019 (% GDP): Actual CA: –2.3; Cycl. Adj. CA: –2.0; EBA CA Norm: –0.7; EBA CA Gap: –1.3; Staff Adj.: 0.0; Staff CA Gap: –1.3. - Staff assesses the 2019 cyclically adjusted CA to be -0.8 to -1.8 percent of GDP lower than the level implied by medium-term fundamentals and desirable policies. - Real exchange rate assessment: - REER appreciation: 2019 (pa) appreciated by 2.8 percent; as of end-2019 REER about 17 percent higher than the average for 2014; through March 2020 USD appreciated 3.2 percent in real terms relative to the 2019 average. - Staff assesses the 2019 average REER to be somewhat overvalued, in the 8-14 percent range, with a midpoint of 11 percent. ### Risk Assessment Matrix (selected risks, likelihood, impact, and recommended policy responses) - Prolonged COVID-19 outbreak - Likelihood of realization: High - Expected impact if realized: High - Policy response and recommendations: - Fiscal packages should aim at minimizing undue balance sheet dislocations, preserve employer-employee relations, and support household income. - Monetary policy should remain accommodative and prevent an excessive tightening of financial conditions. - Asset purchases and emergency credit facilities can be scaled up to address market disruptions in credit markets. - More protectionism - Likelihood of realization: High - Expected impact if realized: Medium - Policy response and recommendations: - Reverse trade restrictions; work with partner countries and the WTO to address trade-distorting policies. - Avoid measures that could escalate trade tensions. - Widespread social discontent and political instability - Likelihood of realization: High - Expected impact if realized: Medium - Policy response and recommendations: - Improve social assistance; support the unemployed; increase resources to healthcare providers; increase health preparedness; ensure access to affordable, quality health care for the uninsured. - Oversupply in the oil market - Likelihood of realization: High - Expected impact if realized: Medium - Policy response and recommendations: - Federal Reserve’s Section 13(3) credit facilities can provide liquidity support to cash-constrained, but solvent, energy corporates. - Fiscal measures could be deployed to facilitate industry adjustment to lower prices. - Rising vulnerabilities in the U.S. corporate sector - Likelihood of realization: Medium - Expected impact if realized: High - Policy response and recommendations: - Emergency liquidity support if financial market dislocations emerge. - Preserve strong capital buffers via tighter limits on dividend distributions and buybacks. - Develop and deploy macroprudential tools to address nonbank sector vulnerabilities. - Risks facing state and local governments - Likelihood of realization: Medium - Expected impact if realized: Medium - Policy response and recommendations: - Large increase in federal transfers to states to support essential services and avoid procyclical subnational fiscal tightening. - This would mitigate cuts to social assistance, healthcare, unemployment insurance, and education. *Source: 1usaea2020001 - 79. ### Appendix III. Public Debt Sustainability Analysis ### Appendix III. Public Debt Sustainability Analysis ### Key findings and outlook - Due to the unprecedented fiscal response to the COVID-19 outbreak, the U.S. budget deficit increased considerably in 2020, and the U.S. public debt-to-GDP ratio is on an unsustainable path. - Under the baseline (current laws), public debt is projected to rise considerably in 2020 reflecting automatic and discretionary fiscal responses and a smaller economy, and to continue rising in the medium term as age-related spending pressures on entitlement programs assert themselves. - Federal debt held by the public is projected to increase from about 79 percent of GDP in FY2019 to around 109 percent of GDP in 2029. - General government gross debt is projected to rise from about 109 percent of GDP in FY2019 to 148 percent of GDP in 2029. - Gross financing needs are large but considered manageable given the global reserve currency status of the U.S. dollar. ### Baseline numerical projections (selected) - General government primary deficit: 4.1 percent of GDP in 2019; projected at 20.5 percent of GDP in 2020. - Staff baseline effective interest rate: current level of 1.0 percent rising gradually to 2.0 percent by 2029. - Real GDP growth (selected years): 2019 = 2.3 percent; 2020 = -6.6 percent; 2021 = 3.9 percent; 2022 = 3.3 percent; 2023–2029 = 2.3, 1.9, 1.8, 1.7, 1.7, 1.7 (respectively). - Inflation (GDP deflator) projections: 2020 = 1.2 percent; 2021–2029 = 2.1 percent each year. - Nominal gross public debt series (selected): 2019 = 108.7 (percent of GDP), 2020 = 138.2, 2021 = 142.2, 2022 = 143.0, 2023 = 143.9, 2024 = 145.2, 2025 = 146.3, 2026 = 146.8, 2027 = 147.1, 2028 = 147.5, 2029 = 147.8. - Public gross financing needs (percent of GDP, selected): 2019 = 41.6; 2020 = 59.1; 2021 = 48.2; 2022 = 42.4; 2023 = 41.8; 2024 = 43.8; 2025 = 42.3; 2026 = 40.3; 2027 = 36.3; 2028 = 29.8; 2029 = 26.8. - Cumulative change in gross public sector debt (selected): 2020 = 29.5; cumulative 2009–2029 = 39.1 (percent of GDP, as shown in projections table). - Primary (noninterest) revenue and grants cumulative 2009–2029 = 293.8 (percent of GDP, sum of annual projections shown). - Primary (noninterest) expenditure cumulative 2009–2029 = 361.0 (percent of GDP, sum of annual projections shown). ### Adjustment scenario and policy recommendations - Staff recommends an additional 10½ percent of GDP stimulus through 2023 to bring the economy to full employment, reflecting the still considerable output gap and historically low borrowing cost. - To place the debt-to-GDP ratio firmly on a downward path in the medium term, staff indicate the need to gradually raise the primary general government surplus to around ¾ percent of GDP. - For the federal government specifically, a target primary surplus of 1¾ percent of GDP is indicated as necessary to put the debt ratio on a declining trajectory. - The target primary surplus would need to be larger than the above to bring the debt ratio closer to pre-Great Recession levels by 2034. - Policy approach recommended: a credible medium-term fiscal adjustment featuring reprioritization of budget programs and revenue-gaining tax reform. ### Debt servicing, realism of assumptions, and mitigating factors - The favorable interest rate-growth differential benefits fiscal projections, reflecting accommodative monetary policy and safe-haven status of the United States. - Under the baseline, real interest rates act as a debt-reducing flow over the medium term (effective interest rate rising from 1.0 percent to 2.0 percent by 2029 but remaining considerably below its 2009–17 average). - Baseline economic assumptions are within the historical error band observed across countries; baseline fiscal projections and implied near-term adjustment are outliers relative to historical and cross-country experience but are considered realistic given the pandemic-related fiscal expansion. - Mitigating factors: the depth and liquidity of the U.S. Treasury market and the safe-haven status of U.S. assets reduce near-term rollover and external financing risks. - Nonetheless, uncertainties in global capital dynamics imply risks to external and gross financing requirements remain. ### Stress tests and vulnerability analysis (selected results) - Sensitivity to interest rates: - An increase of 100 basis points in the sovereign risk premium would raise the public debt ratio to about 156 percent of GDP by 2029, about 8 percentage points of GDP above the baseline. - Sensitivity to growth: - If real GDP growth were one standard deviation below the baseline, public debt would increase by about 3 percentage points above the baseline by 2029. - Fiscal shock: - 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 4 percentage points above the baseline by 2029. - Combined shocks: - A combined macro-fiscal shock could raise the public debt ratio to as high as 161 percent of GDP by 2029. - Exchange rate shock: - An exchange rate shock does not have major implications for debt sustainability in the United States given that all debt is denominated in local currency and the reserve currency status of the dollar. ### External Debt Sustainability (selected highlights from Appendix IV) - Baseline external debt (percent of GDP): 2019 = 88.4; 2020 = 96.2; 2021 = 93.3; 2022 = 91.1; 2023 = 90.0; 2024 = 88.9; 2025 = 87.7. - Change in external debt (percent of GDP): 2019 = -3.4; 2020 = 7.8; 2021 = -2.9; 2022 = -2.2; 2023 = -1.2; 2024 = -1.0; 2025 = -1.2. - Identified external debt-creating flows (percent of GDP): 2020 = 8.3; 2021 = -1.5; 2022 = -0.6; 2023 = 0.3; 2024 = 0.5; 2025 = 0.6. - Automatic debt dynamics contribution (percent of GDP): 2020 = 6.1; 2021 = -3.6; 2022 = -2.9; 2023 = -2.0; 2024 = -1.6; 2025 = -1.6. - External debt-to-exports ratio (percent): 2019 = 749.6; 2020 = 888.8; 2021 = 855.2; 2022 = 827.6; 2023 = 807.3; 2024 = 792.2; 2025 = 779.5. - Gross external financing need (in billions of US dollars): 2019 = 19,101.7; 2020 = 19,118.6; 2021 = 20,427.1; 2022 = 21,036.1; 2023 = 21,656.8; 2024 = 22,244.1; 2025 = 22,779.9. - Gross external financing need (percent of GDP, selected): 2019 = 89.1 (percent of GDP as shown in table formatting). *Source: IMF staff calculations, Appendix III. Public Debt Sustainability Analysis and Appendix IV. External Debt Sustainability Analysis.* ### Appendix IV. Figure 1. External Debt Sustainability: Bound Tests 1/ 2/ ### Appendix IV. Figure 1. External Debt Sustainability: Bound Tests 1/ 2/ ### Figure summary and variables - Title: External Debt Sustainability: Bound Tests 1/ 2/ (External debt in percent of GDP) - Primary variable displayed: External debt (in percent of GDP) - Scenarios/shocks shown in panels: Interest rate shock; Baseline and historical scenarios; Non-interest current account (CA) shock; Combined shock 3/; Real depreciation shock 4/; Growth shock; Gross financing need under baseline (right scale) - Shaded areas represent actual data. - Sources: International Monetary Fund, Country desk data, and staff estimates. ### Key scenario values and box figures (as presented) - Interest rate shock panel: - i-rate shock - Baseline: 88 - Historical: 88 - Baseline and historical scenarios panel: - Historical: 90 - Baseline: 88 - Additional plotted tick values shown: 80, 85, 90, 95, 100 (axis values) - Non-interest current account (CA) shock panel: - CA shock: 89 - Baseline: 88 - Combined shock panel: - Combined shock 3/: 89 - Baseline: 88 - Real depreciation shock panel: - 30 % depreciation - Real depreciation shock 4/: 93 - Baseline: 88 - Growth shock panel: - Growth shock: 89 - Baseline: 88 - Panels show time axis ticks: 2015 2017 2019 2021 2023 2025 - Axis tick values repeated across panels: 20 30 40 50 60 70 80 90 100 ### Baseline / scenario / historical summary numbers (exact presentation in figure) - Baseline: - Baseline: 0.0 - Scenario: 0.0 - Historical: 0.0 - Baseline: - Baseline: 2.6 - Scenario: 2.4 - Historical: 2.3 - Baseline: - Baseline: -2.1 - Scenario: -2.2 - Historical: -2.3 ### Notes on shock design and historical projection methodology (figure footnotes) - 1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown. - 2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead. - 3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance. - 4/ One-time real depreciation of 30 percent occurs in 2020. *Source: International Monetary Fund, Country desk data, and staff estimates.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1usaea2020001.pdf_