## 1. Implications for the International Corporate Tax System ## Source details **Canonical URL:** [1. Implications for the International Corporate Tax System](https://www.imf.org/-/media/files/publications/cr/2021/english/1usaea2021001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2021/english/1usaea2021001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2021/english/1usaea2021001.pdf.json) --- ### Pandemic and recovery: macroeconomic context and implications for taxation - Health and vaccination: - More than 600,000 Americans have died. - A third wave peaked in early January with new cases reaching 300,000 per day, test positivity rate hit 14 percent, and deaths exceeded 3,000 per day. - By mid-June, over one-half of the eligible population have been fully vaccinated. - Consumption and growth: - Share of services in consumption fell from 69 percent in 2019 to 66 percent in 2021Q1. - Economy grew by 6.4 percent in the first quarter, despite a 2.6 percent drag from the drawdown of inventories. - Growth in 2021 is expected to be around 7 percent. - Labor market and balance-sheet effects: - Household saving rate remains very high. - Employment-population ratio remains around 3 percent below the pre-pandemic level. - New business applications in 2020 were 24 percent above 2019 levels. - At the time of the 2020 Article IV a stress test projected 15 percent of non-energy, non-investment grade debt in financial distress in 2020; actual default ended up at 2.5 percent for that category. ### Unprecedented fiscal support: discretionary packages and composition - Major discretionary spending packages and headline sizes (US$ billion): - Consolidated Appropriations Act (December 2020): 868 - Support for small businesses (including Paycheck Protection Plan): 302 - One-time stimulus payments: 169 - Unemployment benefits (including US$300 per week supplement until March): 119 - Funding for schools and colleges: 82 - Public health (including testing and vaccinations): 79 - Other (including food assistance, transportation, broadband, banking): 117 - American Rescue Plan (March 2021): 1,850 - Funding for schools, colleges, transit, childcare, food assistance, healthcare, housing: 486 - One-time stimulus payments: 402 - Transfers to state and local government: 362 - Unemployment benefits (including US$300 per week supplement until September): 206 - Refundable child tax credit and earned income tax credit: 111 - Other (including FEMA, support to small businesses, multi-employer pensions): 283 - American Jobs Plan (proposed) / Bipartisan Agreement on Infrastructure Plan: 2,300 / 579 - Transportation (including electric vehicle charging): 630 / 312 - Water, power, broadband, resilience, and environmental remediation: 360 / 267 - R&D and support for domestic manufacturing: 580 / 0 - Elderly and disabled care: 400 / 0 - Housing, federal buildings, schools: 330 / 0 - Note: While the Bipartisan Infrastructure Plan includes some proposals under the American Jobs Plan, it is not a strict subset. - American Families Plan (proposed): 2,050 - Extending child tax credit until 2025 and making it refundable thereafter: 545 - Tax credits and subsidies for childcare costs: 305 - Paid parental, family, or sick leave: 225 - Making permanent tax credits to subsidize health insurance premia: 200 - Universal pre-school: 200 - Making permanent expanded earned income tax credit: 140 - Grants for low income students attending college and nutrition: 125 - Improving college recruitment and retention and other education initiatives: 120 - Two-years of tuition-free community college: 110 - Strengthen IRS enforcement: 80 - Assessment and targeting: - American Rescue Plan “added 8.2 percent of 2021 GDP to spending.” - IMF assessment: sizeable share of the package did not relieve immediate liquidity constraints; resources improved household, corporate and subnational government balance sheets at the expense of an increase in the federal debt. - Suggested targeting adjustments: - Focus stimulus payments to a smaller share (e.g., those earning below the median income). - Lessen transfers to state and local governments that replenish rainy day funds rather than meet immediate cash needs. - Gradually scale back supplemental unemployment benefits during 2021 to limit “cliff” effects and reduce negative incentive effects as labor markets improve. - Reorientation recommendation for Jobs and Families proposals: - Phase out certain assistance (e.g., child tax credit, Child and Dependent Care Tax Credit) at lower household income thresholds (e.g., at 300–400 percent of the federal poverty level or at the state-level median income). - Recast support for domestic manufacturing, semiconductors, and onshoring as investments in basic research, human capital, and infrastructure to encourage productivity. - Reconsider the size of support for home and community-based care for the elderly and disabled to prioritize supply-side relief and reduce inflation risk. ### Proposed tax policy changes and implications for international corporate taxation - Key proposed tax changes: - Increase statutory corporate tax rate to 28 percent. - Global minimum tax on offshore profits of U.S. multinationals of 15 percent, calculated on a country-by-country basis; deductions denied for payments to countries that fail to adopt a strong minimum tax. - Corporations above a certain size required to pay at least 15 percent on “book income” reported to investors. - Eliminate current lower corporate rate on income from foreign sales (FDII). - Measures to reduce tax benefits of inversions, incentivize onshoring, and remove tax preferences for fossil fuel companies. - Raise top personal income tax rate for married couples earning over US$622,051 from 37 to 39.6 percent. - “Qualified” dividends and capital gains taxed at the top personal income tax rate (39.6 percent plus the existing 3.8 percent Affordable Care Act surtax) for households earning over US$1 million. - Eliminate the “carried interest” provision. - Eliminate the “step-up basis” for capital gains in excess of US$2 million (for a married couple). - Fully resource the Internal Revenue Service to upgrade systems, expand audits, and strengthen tax administration. - Consistency with IMF advice: - Permanent increases in taxes on corporate profits and high-income households are warranted given permanent spending increases. - Globally coordinated minimum corporate tax applied country-by-country is crucial to counter profit shifting and base erosion. - Excluding deductions paid to countries without a global minimum tax aligns with the “undertaxed payment rule” in the OECD’s Pillar Two proposals. - Removing FDII tax preferences reduces potential WTO challenges and levels the playing field. - Closing loopholes on recharacterizing labor income and capital gains is appropriate (though IMF suggests fully eliminating step-up basis rather than retaining a US$2 million exemption). - Increased IRS funding has potentially large revenue and equity payoffs. ### Analysis: effects on investment, debt bias, and capital formation - Direct impacts on taxation of returns: - Combined effects (28 percent corporate rate and taxation of dividends and capital gains as ordinary income plus state-level taxes) will significantly raise the statutory rate on equity-financed investments. - Example: combined federal and state-level marginal statutory rate on income from equity-financed investments could be as high as 72 percent in California. - The tax burden on equity-financed investments—particularly intangibles—will be increased by anti-avoidance mechanisms and the global minimum tax. - Factors mitigating adverse effects: - (i) Marginal effective rate is much lower than the statutory rate. - (ii) Only around one-quarter of equities are currently in the hands of taxable shareholders. - (iii) If the tax is largely incident on rents, a high statutory rate has a lesser effect. - Policy options to address debt bias and capital formation concerns: - Tax dividends and capital gains at a uniform rate of 20–25 percent to align combined corporate plus personal rate on capital income with the top marginal rate on labor income. - Reformulate the business tax as a cashflow tax by permanently allowing expensing of all capital outlays and fully eliminating the deduction for interest spending on newly contracted debt. - Adopt conservative revenue assumptions for the fiscal plans’ increased tax administration yields. ### International implications and design considerations (Box 1 summary) - Broad alignment and expected effects: - The international aspects of the U.S. proposed tax plan are broadly in line with the OECD’s Pillar 2 proposal. - The U.S. plan is consistent with recent moves by other countries to raise statutory corporate income tax rates. - A higher U.S. rate, as well as a global minimum tax, may help coordinate an end to the downward path for corporate tax rates internationally. - Effects on effective average tax rates: - The tax plan raises the effective average tax rate (EATR) on multinationals headquartered in the U.S., largely because of the higher statutory rate and elimination of a lower tax rate on profits derived from foreign sales in excess of 10 percent of the value of depreciable tangible assets. - Specifically, it is estimated that the EATR on equity-financed investment into intangibles would rise from 13.6 to 24.8 percent. - Other mechanisms proposed (e.g., disallowing deductions for payments to low tax jurisdictions) will further increase the EATR. - Current international tax positions: - The average (foreign and U.S.) tax paid by U.S. controlled foreign corporations is currently 9.8 percent for all jurisdictions (and 7 percent if only low-tax jurisdictions are included). - As such, a 15 percent global tax would be binding for many U.S. multinationals. - Importance of coordination: - In the absence of a global agreement on a minimum tax: - Changes will disincentivize companies from headquartering in the U.S. - A coordinated global agreement on a minimum tax will be important to level the playing field internationally, disincentivize jurisdictions from maintaining a low corporate tax rate, and mitigate locational disadvantages from other proposed U.S. tax changes (including the higher statutory rate, more binding anti-avoidance provisions, and minimum tax on book income). - Design considerations: - Important that the U.S. global minimum tax is assessed on a jurisdiction-by-jurisdiction basis and does not provide an exemption based on assets (i.e., unlike the GILTI provision which was calculated based on a worldwide average with an exemption equal to 10 percent of the foreign-located, depreciable tangible assets). - Denying deductions for payments made to related parties in low tax jurisdictions that do not have a minimum tax should provide a reinforcing incentive to adopt the global minimum. ### Revenue constraint and alternative tax measures - Political constraint: - The administration’s commitment not to raise taxes on households earning under US$400,000 per year (which encompasses 98 percent of households) represents an important constraint on the options for raising revenue. - Alternative revenue options that could be considered absent that constraint: - Increasing reliance on indirect taxes, particularly those that will help achieve the administration’s climate goals such as introducing a carbon tax and/or raising federal fuel taxes (with sensitivity to distributional impacts). - Eliminating the current 20 percent (section 199A) deduction for certain types of pass-through income. - Scaling back poorly targeted tax expenditures such as the income tax exemption for employer-provided health care, the capital gains tax exemptions for individuals selling their principal residence, and the deductibility of mortgage interest and state and local taxes. - Lowering the minimum threshold for the estate tax (from the current level of US$23.4 million for a married couple). ### Authorities’ views on tax policy and enforcement - Policy objectives and rationale: - Tax policies were designed to reverse the decline in federal revenue-GDP over the past five years in order to fund essential federal government programs. - It was equitable to have high net worth individuals and corporations bear much of that burden, particularly in light of the lowering of taxes under the 2017 Tax Cuts and Jobs Act. - The proposed “Made in America Tax Plan” is seen as striking a balance between raising revenues and incentivizing job creation and investment. - The effective rate on U.S. corporate profits was still low relative to history and was unlikely to be a significant disincentive to new investment, particularly with much of U.S. corporate profit reflecting rents rather than normal returns to capital. - Improvements in tax enforcement and administration would help address tax evasion and make for a fairer tax code. - The goal of many proposed tax policy changes was to reward work and not wealth, especially by eliminating loopholes used by corporations and high net worth individuals. - Proposed changes to the international corporate tax system were viewed as consistent with OECD proposals and would help: - Reverse the “race to the bottom” in corporate taxes, - Curtail wasteful profit shifting to low tax jurisdictions, - Bring stability to the global tax system. - The proposed legislation was viewed as being fully consistent with the U.S. negotiating position in the OECD process. *Source: 1. Implications for the International Corporate Tax System — IMF country report excerpt.* ### 1. Implications for the International Corporate Tax System ______________________________________ 14 ### 1. Implications for the International Corporate Tax System ### Pandemic and Recovery: Macroeconomic context and implications for taxation - COVID-19 impacts: - More than 600,000 Americans have died. - A third wave peaked in early January with new cases reaching 300,000 per day, test positivity rate hit 14 percent, and deaths exceeded 3,000 per day. - By mid-June, over one-half of the eligible population have been fully vaccinated. - Share of services in consumption fell from 69 percent in 2019 to 66 percent in 2021Q1. - Economy grew by 6.4 percent in the first quarter, despite a 2.6 percent drag from the drawdown of inventories. - Growth in 2021 is expected to be around 7 percent. - Labor market and balance-sheet effects: - Household saving rate remains very high. - Employment-population ratio remains around 3 percent below the pre-pandemic level, largely due to diminished participation and higher unemployment among lower-income, less-skilled workers. - New business applications in 2020 were 24 percent above 2019 levels. - Policy response reduced corporate bankruptcies relative to past history; at the time of the 2020 Article IV a stress test projected 15 percent of non-energy, non-investment grade debt in financial distress in 2020, but actual default ended up at 2.5 percent for that category. ### Unprecedented fiscal support: discretionary packages and composition - Major discretionary spending packages (Text Table 1: U.S. Discretionary Spending Packages (US$ billion)): - Consolidated Appropriations Act (December 2020): 868 - Support for small businesses (including Paycheck Protection Plan): 302 - One-time stimulus payments: 169 - Unemployment benefits (including US$300 per week supplement until March): 119 - Funding for schools and colleges: 82 - Public health (including testing and vaccinations): 79 - Other (including food assistance, transportation, broadband, banking): 117 - American Rescue Plan (March 2021): 1,850 - Funding for schools, colleges, transit, childcare, food assistance, healthcare, housing: 486 - One-time stimulus payments: 402 - Transfers to state and local government: 362 - Unemployment benefits (including US$300 per week supplement until September): 206 - Refundable child tax credit and earned income tax credit: 111 - Other (including FEMA, support to small businesses, multi-employer pensions): 283 - American Jobs Plan (proposed) / Bipartisan Agreement on Infrastructure Plan: 2,300 / 579 - Transportation (including electric vehicle charging): 630 / 312 - Water, power, broadband, resilience, and environmental remediation: 360 / 267 - R&D and support for domestic manufacturing: 580 / 0 - Elderly and disabled care: 400 / 0 - Housing, federal buildings, schools: 330 / 0 - Note: While the Bipartisan Infrastructure Plan includes some proposals under the American Jobs Plan, it is not a strict subset. - American Families Plan (proposed): 2,050 - Extending child tax credit until 2025 and making it refundable thereafter: 545 - Tax credits and subsidies for childcare costs: 305 - Paid parental, family, or sick leave: 225 - Making permanent tax credits to subsidize health insurance premia: 200 - Universal pre-school: 200 - Making permanent expanded earned income tax credit: 140 - Grants for low income students attending college and nutrition: 125 - Improving college recruitment and retention and other education initiatives: 120 - Two-years of tuition-free community college: 110 - Strengthen IRS enforcement: 80 - Assessment of targeting and design: - American Rescue Plan “added 8.2 percent of 2021 GDP to spending.” - IMF assessment: sizeable share of the package did not relieve immediate liquidity constraints; resources improved household, corporate and subnational government balance sheets at the expense of an increase in the federal debt. - Suggested targeting adjustments: - Focus stimulus payments to a smaller share (e.g., those earning below the median income). - Lessen transfers to state and local governments that replenish rainy day funds rather than meet immediate cash needs. - Gradually scale back supplemental unemployment benefits during 2021 to limit “cliff” effects and reduce negative incentive effects as labor markets improve. - Reorientation recommendation for Jobs and Families proposals: - Phase out certain assistance (e.g., child tax credit, Child and Dependent Care Tax Credit) at lower household income thresholds (e.g., at 300–400 percent of the federal poverty level or at the state-level median income). - Recast support for domestic manufacturing, semiconductors, and onshoring as investments in basic research, human capital, and infrastructure to encourage productivity. - Reconsider the size of support for home and community-based care for the elderly and disabled to prioritize supply-side relief and reduce inflation risk. ### Proposed tax policy changes and implications for international corporate taxation - Key proposed tax changes: - Increase statutory corporate tax rate to 28 percent. - Global minimum tax on offshore profits of U.S. multinationals of 15 percent, calculated on a country-by-country basis; deductions denied for payments to countries that fail to adopt a strong minimum tax. - Corporations above a certain size required to pay at least 15 percent on “book income” reported to investors. - Eliminate current lower corporate rate on income from foreign sales (FDII). - Measures to reduce tax benefits of inversions, incentivize onshoring, and remove tax preferences for fossil fuel companies. - Raise top personal income tax rate for married couples earning over US$622,051 from 37 to 39.6 percent. - “Qualified” dividends and capital gains taxed at the top personal income tax rate (39.6 percent plus the existing 3.8 percent Affordable Care Act surtax) for households earning over US$1 million. - Eliminate the “carried interest” provision. - Eliminate the “step-up basis” for capital gains in excess of US$2 million (for a married couple). - Fully resource the Internal Revenue Service to upgrade systems, expand audits, and strengthen tax administration. - Consistency with IMF advice: - Permanent increases in taxes on corporate profits and high-income households are warranted given permanent spending increases. - Globally coordinated minimum corporate tax applied country-by-country is crucial to counter profit shifting and base erosion. - Excluding deductions paid to countries without a global minimum tax aligns with the “undertaxed payment rule” in the OECD’s Pillar Two proposals. - Removing FDII tax preferences reduces potential WTO challenges and levels the playing field. - Closing loopholes on recharacterizing labor income and capital gains is appropriate (though IMF suggests fully eliminating step-up basis rather than retaining a US$2 million exemption). - Increased IRS funding has potentially large revenue and equity payoffs. ### Analysis: effects on investment, debt bias, and capital formation - Potential disincentives and mitigants: - Combined effects (28 percent corporate rate and taxation of dividends and capital gains as ordinary income plus state-level taxes) will significantly raise the statutory rate on equity-financed investments. - Example: combined federal and state-level marginal statutory rate on income from equity-financed investments could be as high as 72 percent in California. - The tax burden on equity-financed investments—particularly intangibles—will be increased by anti-avoidance mechanisms and the global minimum tax. - Factors that lessen adverse effects: - (i) Marginal effective rate is much lower than the statutory rate. - (ii) Only around one-quarter of equities are currently in the hands of taxable shareholders. - (iii) If the tax is largely incident on rents, a high statutory rate has a lesser effect. - Policy options to address debt bias and capital formation concerns: - Tax dividends and capital gains at a uniform rate of 20–25 percent to align combined corporate plus personal rate on capital income with the top marginal rate on labor income. - Reformulate the business tax as a cashflow tax by permanently allowing expensing of all capital outlays and fully eliminating the deduction for interest spending on newly contracted debt. - Adopt conservative revenue assumptions for the fiscal plans’ increased tax administration yields. *Source: 1. Implications for the International Corporate Tax System — IMF country report excerpt.* ### 14. The administration’s commitment not to ### 14. The administration’s commitment not to ### Revenue constraint and alternative tax measures - The administration’s commitment not to raise taxes on households earning under US$400,000 per year (which encompasses 98 percent of households) represents an important constraint on the options for raising revenue. - Without this limitation, further tax policy changes could be considered that raise revenues but without increasing the tax burden for households earning around the median income. These could include: - Increasing the reliance on indirect taxes, particularly those that will help achieve the administration’s climate goals such as introducing a carbon tax and/or raising federal fuel taxes. A carbon tax would, though, have to be sensitive to its impact on the income distribution, potentially requiring accompanying increases in targeted social assistance. - Eliminating the current 20 percent (section 199A) deduction for certain types of pass-through income. - Scaling back poorly targeted tax expenditures such as the income tax exemption for employer-provided health care, the capital gains tax exemptions for individuals selling their principal residence, and the deductibility of mortgage interest and state and local taxes. - In addition, the minimum threshold for the estate tax could be lowered (from the current level of US$23.4 million for a married couple). ### Authorities’ views on tax policy and enforcement (paragraph 15) - Tax policies were designed to reverse the decline in federal revenue-GDP over the past five years in order to fund essential federal government programs. - It was equitable to have high net worth individuals and corporations bear much of that burden, particularly in light of the lowering of taxes under the 2017 Tax Cuts and Jobs Act. - The proposed “Made in America Tax Plan” is seen as striking a balance between raising revenues and incentivizing job creation and investment. - The effective rate on U.S. corporate profits was still low relative to history and was unlikely to be a significant disincentive to new investment, particularly with much of U.S. corporate profit reflecting rents rather than normal returns to capital. - Improvements in tax enforcement and administration would help address tax evasion and make for a fairer tax code. - The goal of many proposed tax policy changes was to reward work and not wealth, especially by eliminating loopholes used by corporations and high net worth individuals. - Proposed changes to the international corporate tax system were viewed as consistent with OECD proposals and would help: - Reverse the “race to the bottom” in corporate taxes, - Curtail wasteful profit shifting to low tax jurisdictions, - Bring stability to the global tax system. - The proposed legislation was viewed as being fully consistent with the U.S. negotiating position in the OECD process. ### Box 1 — Implications for the International Corporate Tax System - The international aspects of the U.S. proposed tax plan are broadly in line with the OECD’s Pillar 2 proposal. - The U.S. plan is consistent with recent moves by other countries to raise statutory corporate income tax rates. - A higher U.S. rate, as well as a global minimum tax, may help coordinate an end to the downward path for corporate tax rates internationally. - The tax plan raises the effective average tax rate (EATR) on multinationals headquartered in the U.S., largely because of the higher statutory rate and elimination of a lower tax rate on profits derived from foreign sales in excess of 10 percent of the value of depreciable tangible assets. - Specifically, it is estimated that the EATR on equity-financed investment into intangibles would rise from 13.6 to 24.8 percent. - Other mechanisms proposed (e.g., disallowing deductions for payments to low tax jurisdictions) will further increase the EATR. - The average (foreign and U.S.) tax paid by U.S. controlled foreign corporations is currently 9.8 percent for all jurisdictions (and 7 percent if only low-tax jurisdictions are included). - As such, a 15 percent global tax would be binding for many U.S. multinationals. - In the absence of a global agreement on a minimum tax: - Changes will disincentivize companies from headquartering in the U.S. - A coordinated global agreement on a minimum tax will be important to level the playing field internationally, disincentivize jurisdictions from maintaining a low corporate tax rate, and mitigate locational disadvantages from other proposed U.S. tax changes (including the higher statutory rate, more binding anti-avoidance provisions, and minimum tax on book income). - Design considerations: - It will be important that the U.S. global minimum tax is assessed on a jurisdiction-by-jurisdiction basis and does not provide an exemption based on assets (i.e., unlike the GILTI provision which was calculated based on a worldwide average with an exemption equal to 10 percent of the foreign-located, depreciable tangible assets). - Such a design will make the tax more binding and independent of a firm’s assets, its allocated expenses, and the share of profits it derives from low tax jurisdictions. - Denying deductions for payments made to related parties in low tax jurisdictions that do not have a minimum tax should provide a reinforcing incentive to adopt the global minimum. ### The shift in the monetary policy framework (paragraphs 16–21) - In August 2020 the Federal Reserve announced changes to its policy framework: - (i) The FOMC would seek to achieve inflation that averages 2 percent over time (following periods when inflation has been running persistently below target, policy would aim to achieve inflation moderately above 2 percent for some time). - (ii) Policy decisions would react to mitigate shortfalls of employment from the FOMC’s assessment of its maximum level. - Policy would continue to take into account the balance of risks, including systemic risks to financial stability. - Rationale: - The change recognizes policy would be more frequently constrained by the effective lower bound—due to a decline in the neutral rate—which increases downside risks to both employment and inflation. - Policy is intended to be more accommodative for a longer period after a negative shock to get the economy back to full employment and away from the effective lower bound. - Consistency with past IMF advice: - Given the decline in the neutral rate of interest and asymmetries posed by the effective lower bound, past Article IVs emphasized readiness to accept modest, temporary overshooting of the inflation goal so inflation approaches the 2 percent medium-term target from above. - The flexible average inflation targeting framework provides a structure to operationalize this approach; the size and duration of intended overshoot should be data dependent. - Benefits of the new framework in the context of COVID-19: - First: Designed to provide more accommodation over a longer horizon in response to a negative shock. The precommitment to overshoot helps increase expected inflation over the near-term, lowering today’s real interest rate and boosting demand. - Second: Allows the Fed to not react pre-emptively based on policymakers’ forecasts of inflation and, instead, place more weight on inflation expectations and realized inflation. - Third: Embeds outcomes-based forward guidance that the federal funds rate will remain at the effective lower bound until inflation rises to 2 percent and is on track to moderately exceed 2 percent for some time. - Fourth: The more accommodative framework should help repair some of the damage to the income distribution caused by the pandemic. - Interaction with fiscal policy: - The combination of the new monetary policy framework and fiscal stimulus should be self-reinforcing: FAIT increases the demand impact of fiscal support by providing more accommodation, and fiscal boost raises likelihood that inflation sustainably exceeds 2 percent. - Risks and timeline for normalization: - The unprecedented size of planned fiscal support will significantly compress the timeline for policy normalization. - Reopening will create unpredictability in PCE inflation during the next several months, complicating identification of underlying inflationary trends. - Presuming staff’s baseline outlook and fiscal policy assumptions are realized, policy rates will likely need to start rising in late-2022 or early-2023 (with asset purchases being scaled back in the first half of 2022). - Managing the transition will require deft communications to mitigate market misunderstandings, volatility in market pricing, or unwarranted tightening of financial conditions. - The Federal Reserve’s commitment to communicate well in advance its thinking and to ensure that the eventual withdrawal of monetary accommodation is orderly, methodical, and transparent is welcome. - Authorities’ views on the framework: - The substantial decline in the neutral rate necessitated a shift to more firmly anchor long-term inflation expectations at the longer-run 2 percent goal and to increase monetary policy’s power to return the economy to full employment after a negative shock. - The Flexible Average Inflation Targeting approach is expected to achieve these goals. - The FOMC’s implementation embeds clear forward guidance: begin raising rates only after labor market conditions are consistent with maximum employment and inflation has risen to 2 percent and is on track to moderately exceed that level for some time. - Recent price rises as the economy reopens are expected to have largely transitory effects on inflation; employment remains well below estimates of its maximum level. - It is expected to take some time before withdrawal in monetary accommodation would be appropriate, contingent on economic performance. - The Federal Reserve remains conscious of international spillovers and committed to clear communication regarding shifts in asset purchases or policy rates. ### Box 2 — Monetary Policy and Consumption Inequality (summary) - In a heterogeneous agents model with price and wage rigidities: - Lower income households have relatively low skills, rely on labor income, and hold few claims on capital; positive productivity shocks predominantly benefit higher income households. - Welfare outcomes can be improved if monetary policy attaches some weight to the distribution of wages (captured by policymakers attaching some weight to the labor share of income in addition to inflation and the aggregate unemployment gap). - In the face of a positive technology shock, policy that weighs both aggregate employment gains and negative impacts on relative wages of unskilled workers would leave policy at more accommodative levels, tolerate temporarily higher inflation, and run the economy hotter to offset effects on lower income workers’ wages. - The size of gains from considering wage distribution depends on the policy benchmark: largest gains versus a simple Taylor rule; more modest but positive gains versus an “optimal control” approach. - The approach has parallels with recent Fed framework changes: - (i) Explicitly targets an overshooting of inflation following a disinflationary shock. - (ii) Reacts only to shortfalls from maximum employment. - These features lead to a less pre-emptive approach, tolerance for temporarily higher inflation, and willingness to run the economy hot. - The analysis does not argue for building consumption inequality into the Fed’s objectives, but supports the Fed’s longstanding approach of using a broad “dashboard” of labor market indicators. ### Box 3 — Spillover Effects From Flexible Average Inflation Targeting (summary) - Simulations using the Fed’s two-country SIGMA model (U.S. and Euro Area) show: - FAIT implies a slower and later pace of normalization in the federal funds rate than under FIT, supporting an overshooting of the 2 percent goal. - The lower path for policy rates reduces dollar funding costs, weakens the dollar, and (on net) loosens global financial conditions (creating positive outward spillovers). - The weaker dollar under FAIT increases U.S. competitiveness and boosts exports; this effect outweighs higher import demand from stronger U.S. growth. - Result: U.S. trade balance improves in the near term (by around 0.4 percentage points of GDP relative to FIT). - If the Euro Area adopted a similar FAIT strategy, the dollar would depreciate by less, U.S. net external demand would be greater, and both Euro Area output and inflation would be higher. - Adoption of FAIT by both central banks would be self-reinforcing and lead to improved outcomes in both the U.S. and Euro Area. - Simulations are based on a baseline incorporating spending under the American Rescue Plan but without the American Jobs and Families Plans. *International Monetary Fund — United States: selected chapters and boxes (excerpts).* ### 22. The combination of the Rescue, Jobs ### 1usaea2021001 - 22. The combination of the Rescue, Jobs ### Macroeconomic impact of Rescue, Jobs and Families Plans - The combination of the Rescue, Jobs and Families Plans, in the context of a Flexible Average Inflation Targeting framework, is estimated to add a cumulative 10¼ percent to the level of GDP during 2021–23. - The baseline forecast incorporates the effects of both the Jobs and Families Plan based on an assumption that they are passed into law in line with the composition and size described above. - Forecasts rely on the empirical and economic modeling literature to define the size of the multipliers for the various policy measures being proposed. - The illustrated multipliers represent the (undiscounted) cumulative addition to the level of aggregate demand over a ten year horizon per unit of additional spending. ### Labor market, supply-side measures, and potential growth - The proposed fiscal plans, combined with the more accommodative monetary framework, are expected to reduce unemployment to close to 3 percent and bring labor force participation to pre-pandemic levels by end-2022. - Supply-side policies expected to support participation and productivity: infrastructure spending, childcare support, paid family leave, expanded healthcare, and a more generous EITC. - Potential growth is expected to move up (to around 2 percent) and the level of real GDP would be higher by around 1 percent in 2030. - After taking into account the impact on output and inflation, the three fiscal packages together are expected to add 3-4 percent of GDP to federal government debt by 2026. ### Inflation outlook, dynamics, and risks - PCE inflation is expected to rise to around 2½ percent by end-2022. - Data point: significant remaining labor market slack; underlying wage and price pressures are dampened by slack. - Core PCE inflation could temporarily peak later in the year at close to 4 percent due to transitory relative price movements. - Once temporary price realignments pass, tightening labor markets and a persistent positive output gap should allow underlying inflation to rise above the Fed’s 2 percent goal in 2022 and remain above for some time. - Important upside risks to inflation could have systemic implications. - As of May, employment was slightly under 10 million persons below the pre-pandemic trend and the underutilization of labor (as measured by U6) was 10.2 percent, around 3¼ percent above pre-pandemic levels. ### Scenarios for inflation and monetary response - Two monetary-policy reaction scenarios if upside inflation risks materialize: - Scenario A: Relative price adjustments and/or a more front-loaded fiscal impact lead to higher realized inflation but medium-term inflation expectations remain well-anchored. Policy emphasis: communicate withdrawal of monetary accommodation and adjust along an orderly timeline. - Scenario B: Sustained mismatch in supply and demand causes high realized wage and price inflation and a de-anchoring of inflation expectations. Policy emphasis: quickly re-anchor expectations, accelerate reduction in asset purchases, and consider raising policy rates before net purchases have been brought to zero, likely creating an abrupt shift in financial conditions and risk premia. - Distinguishing these scenarios in real time will be difficult; near-term emphasis will be on the evolution of inflation expectations. ### Modeling exercises and box summary - Box 4: core PCE inflation (q4/q4) is expected to rise to 2.6 percent by 2023 and then converge to the Fed’s 2 percent long-run target from above, relying on anchored inflation expectations. - SIGMA model simulations (complemented by FRBUS and G20MOD) show a modest core inflation overshoot propelled by the American Rescue, Jobs and Families Plans; G20MOD shows a larger and more persistent inflation impact. - A steeper Phillips curve in SIGMA implies near-term core inflation higher by around 0.4 percentage points when inflation expectations remain anchored. ### External sector, spillovers, and current account - Strong near-term demand will add to the current account deficit. - The U.S. external position is judged to be moderately weaker than the level implied by medium-term fundamentals and desirable policies in 2020 and is expected to weaken further in 2021. - The current account is expected to register a deficit above 3 percent of GDP until 2024. - This current account imbalance is largely driven by the sizable increase in the fiscal deficit; as the fiscal deficit falls, the current account deficit should steadily decline, conditional on private savings drawdown. ### Global spillovers and vulnerabilities - Spillovers to global activity from the rapid U.S. rebound are generally expected to be positive, particularly for Mexico and Canada given strong trade linkages. - Some countries—particularly leveraged EMDEs with weak fundamentals, commodity importers and/or those with an exchange rate pegged to the U.S. dollar—could face greater pressure if dollar funding costs rise abruptly. - A rapid pick-up in U.S. inflation could cause markets to reprice policy-rate paths and inflation risk premia, steepening the yield curve and tightening global financial conditions, with especially adverse effects on Canada, Mexico, and emerging markets with significant gross external financing needs. ### Pandemic and public-health risks - The principal risk continues to emanate from the pandemic: accelerated global infection rates and threat from new variants. - Public health efforts in the U.S. need to continue rigorously, including targeting populations with low vaccination rates and robust contingency planning. - Consideration should be given to establishing a “standing army” for public health to create idle capacity in testing and medical supplies and build a rapid-response unit for testing, tracking and treatment. - The U.S. role in helping other countries—through vaccines, medical supplies, and public health expertise—is important for both humanitarian reasons and reducing domestic COVID-19 risks. ### Fiscal outlook, debt sustainability, and consolidation options - Staff forecasts anticipate an increase in discretionary spending and tax expenditures of US$4.3 trillion over the next decade from the Jobs and Families plans which translates into a cumulative 5¼ percent increase in GDP during 2022–24. - The debt-GDP ratio fails to stabilize under the policies assumed in the baseline but overall risks of sovereign stress are judged to be low and the debt is viewed as sustainable. - The planned changes to the tax system will defray some of the impact of higher spending on the deficit and debt, but further actions will be needed over the medium-term to bring the debt down; aging population and rising healthcare costs are larger medium-term drivers. - Suggested additional measures include: - Introduction of a broad-based federal consumption tax levied at a relatively low rate with offsets for lower income groups via targeted assistance (e.g., increasing food assistance programs, refundable child tax credits, and the EITC). - Accelerating the planned increase in the retirement age, increasing the progressivity of social security benefits, raising the maximum taxable earnings for social security contributions, and indexing benefits to chained CPI. - Containing healthcare cost increases through greater cost sharing with Medicare beneficiaries, efficiency innovations (such as expanded telehealth services), incentives to increase price transparency by healthcare providers, tackling market power among health care providers, and increasing competition in drug pricing. - An increase in the minimum age for Medicare eligibility alongside an expansion of Medicaid and tax credits to ensure coverage for elderly, lower income households. - Policy objective: bring the federal primary balance to 1 percent of GDP (a general government primary balance of ½ percent of GDP). In doing so, general government debt-to-GDP could be put onto a downward path by 2027, lowering general government debt to 125 percent of GDP by 2030. *International Monetary Fund — UNITED STATES chapter content (excerpts).* ### 36. Authorities views. The U.S. was viewed as having substantial fiscal space which provided ### Authorities views. The U.S. was viewed as having substantial fiscal space which provided ### Fiscal position and sovereign risk - The U.S. was viewed as having substantial fiscal space providing important room for maneuver in fiscal policy. - Projections suggested the federal debt-GDP ratio would continue to rise slowly over the medium-term, while the path for real interest spending as a share of GDP was expected to remain well below historical levels. - Assessment: U.S. debt servicing capacity did not present a particular constraint even if debt-GDP were to rise further; nonetheless, as the economy gets closer to full employment it would be desirable for the debt-GDP ratio to start declining to rebuild fiscal buffers over the medium-term. Box: The Sovereign Risk and Debt Sustainability Framework: An Application to the U.S. - Overall risk of sovereign stress: Low. - Rationale: Strength of institutions, depth of the investor pool, the role of the U.S. dollar in the international system, and the Fed’s stabilizing role. - Near term: Mechanical signal Low; Final assessment Low. - Medium term: Fan chart mechanical signal Moderate; Final assessment Low. - Probability of debt stabilizing in the next five years is assessed to be only 40 percent. - GFN (Gross Financing Needs) module: Mechanical signal Moderate; Final assessment Low. - Large GFN driven by high stock of debt and sizeable issuance of short-term debt (around one third of general government debt has a residual maturity of less than one year). - Non-bank financial institutions are a major holder of general government debt; a sudden rise in financing needs should be easily absorbed by the U.S. diversified pool of domestic and international investors. - Long term and stress-test: N.A. ### Structural transitions and socioeconomic implications - The U.S. is facing multiple transitions with important socio-economic implications: - A pandemic recovery that likely creates lasting shifts in consumer preferences and modalities of operation. - The move to a low-carbon economy necessitating significant reallocation of labor and capital. - A demographic transition: 22 percent of the population is expected to be over-65 by 2040; the number of Americans over-85 is expected will double by 2035; the population will be increasingly racially diverse. - Digitalization and evolving technologies remaking production and consumption. - Policy challenges and responses: - The U.S. system’s flexibility and innovativeness position it well to manage transitions, but care is needed to avoid increased income polarization and hollowing out the middle class. - Recommended measures include: - More effective social safety net and broader healthcare coverage. - Increased investments in vocational and academic education. - Greater spending on public investment to raise labor productivity. - Regional development initiatives and subsidies for labor mobility where needed. - Ensuring schools and colleges provide basic technical and critical thinking skills. - Re-examining immigration policies to ensure appropriate supply of skills. ### Health care: shortcomings and policy measures - System characteristics and issues: - The U.S. health system is very costly, fragmented, with highly unequal access and variable quality. - Share of the population without health insurance fell after the Affordable Care Act, but the number of uninsured has been rising since 2016 (adding 2.2 million to the number of uninsured between 2016 and 2019). - The uninsured population is typically low income, with at least one worker in the family, and disproportionately black and Hispanic. - Over half the population relies on employer-provided health insurance; many face losing coverage when unemployment surges. - Measures taken under the American Rescue Plan: - Covered costs of keeping laid-off workers on their former employer’s healthcare plan until September 30. - Fully paid for coverage for the lowest income workers. - Increased premium subsidies for those earning up to 400 percent of the federal poverty level. - Capped the costs an individual pays for a benchmark plan. - Increased incentives for states to expand Medicaid. - Reopened enrollment period for federal exchange policies and increased spending to raise public awareness. - Early indications: number of uninsured has been put back on a downward trajectory. - Authorities’ views on healthcare reform: - Measures under the American Rescue Plan expected to have important impact on coverage and affordability, evidenced by enrollment increases during the special enrollment period. - Administration committed to providing people aged 60 or older the option to enroll in the Medicare program. - Reforms intended to bring down drug prices, including letting Medicare negotiate payment for certain drugs. - U.S. healthcare costs viewed as very high without commensurate better health outcomes. - Contributing factors: technological innovations, adverse incentives from pay-per-procedure model, lack of price transparency, increased consolidation increasing market power in local markets, and uneven quality with lower income communities having less access to high quality care. Box: The High Level of U.S. Healthcare Costs - Healthcare in the U.S. is the most expensive in the world; the cost gap relative to international comparators has grown over time. - About three quarters of the cost differential between the U.S. and OECD comparators is accounted for by inpatient and outpatient care. - Despite resources devoted to healthcare, the U.S. underperforms on health outcomes (e.g. life expectancy, population coverage). - Evidence on market power and markups: - Overall markups (price to marginal cost) almost doubled since the early 1980s. - Hospital markups increased significantly (by more than 6 percent on average) since the late 1990s across U.S. states. - Rising healthcare sector markups account for about one quarter of the increase in per capita healthcare costs in the U.S. since the 1980s. - Hospital markups responsible for 15 percent of the variation in healthcare spending across states. - Rising hospital markups are not associated with lower labor costs or insurance markups. - Physicians’ salaries have risen above pace for salaries of non-physicians (even after controlling for years of education and experience). - Medicaid expansion has increased practitioner wages, suggesting a relatively inelastic supply response. - Policy implications: - Licensing requirements or limits on flow of new medical professionals may have become increasingly binding constraints and may need recalibration. - Ongoing mergers and acquisitions may increase scope for non-competitive pricing, arguing for more assertive antitrust policies at federal and state levels. - Lower markups would increase efficiency and lower the fiscal burden of healthcare. ### A “Greener” Economy: targets, policies, and policy evaluation - Administration targets and plans: - Rejoined the Paris Climate Accord. - Committed to reducing net greenhouse gas emissions by 50–52 percent by 2030 (relative to 2005 levels). - Principal focus: make the U.S. power sector carbon-neutral by 2035 via expansion of renewables and retrofitting thermal and nuclear plants; increase transmission capacity and resilience. - Transportation: tighten fuel efficiency standards, subsidize zero emission cars, build EV charging infrastructure, invest in public transit, replace school buses, transit vehicles, and the federal fleet with electric vehicles. - Buildings: retrofit federal buildings, schools, commercial buildings, and homes for low income households. - Support R&D in green technologies and remove existing tax preferences for fossil fuel companies. - Efforts to reduce implicit subsidies for the fossil fuel industry and for agro-industrial sector; incentives for conservation practices that reduce emissions and enhance carbon sequestration. - Assessment of approach and recommended policy focus: - New impetus is critical and positive; broad scope and significant investments could jump-start low carbon transition. - Achieving climate objectives will be costly and difficult without greater focus on carbon pricing and sectoral-based policies to tilt incentives away from carbon-intensive activities. - While political support is built for a carbon tax, regulatory actions could be strengthened to increase disincentives for greenhouse gas emissions. - Authorities’ views on climate policy: - Committed to achieving revised nationally determined contribution under the Paris Agreement; work underway to ensure power sector carbon-neutral by 2035 and net zero emissions by 2050. - Policies designed to ensure climate action creates well-paying, union jobs, protects public health, and advances environmental justice. - Substantial proposed investments to mitigate climate change and improve resilience, including energy-efficiency improvements, resilience to wildfires/flooding/drought, infrastructure for electric vehicles, remediating abandoned oil and gas wells, and investing in climate science and clean energy research. - Incentives considered to promote conservation practices that reduce emissions and enhance carbon sequestration in soils and ecosystems. Box 7: Achieving Emissions Goals With, and Without, Carbon Pricing (model findings) - Relying on production subsidies alone is fiscally costly: - Subsidies add directly to public expenditures and lower relative cost of clean energy, adding to total energy demand. - Fiscal costs of subsidies rise over time in proportion to increased use of clean energy. - Deficit-financed subsidies serve to boost aggregate demand but also add 28 percent of GDP to the debt stock by 2050. - Combining clean energy subsidies with carbon pricing is more effective: - Carbon pricing raises overall cost of energy and creates first-order reductions in energy demand, amplifying incentives from subsidies. - A policy package with front-loaded subsidies (to R&D and clean energy production) combined with a carbon tax that starts at US$17 per ton of CO2 and gradually rises by around 9 percent per year would be able to achieve the administration’s targeted reduction in emissions without adding to debt-GDP. - Model simulations assume unilateral U.S. actions; U.S. action could catalyze more ambitious policies abroad and create positive spillovers via clean energy R&D. Box 8: “Pricing” Policies to Strengthen U.S. Greenhouse Gas Mitigation - Economic efficiency argues for a broad-based carbon tax integrated into federal fuel taxes and extended to coal, natural gas, and other fossil fuels. - Sectoral carbon pricing instruments (feebates) can complement a carbon tax: - Feebates: revenue-neutral sliding scale of fees on above-average emission intensities combined with rebates for below-average emission intensities. - Advantages of feebates: - Promote emissions-intensity reductions within sectors. - More cost-effective than regulatory limits (which would need credit trading to match efficiency). - Create certainty over future emissions prices. - Not an additional fiscal cost. - Avoid an additional tax burden beyond economy-wide carbon pricing. - Complement regulations by incentivizing exceeding regulatory standards. - Feebate designs: - Transportation: tax/subsidize new vehicle sales based on desired carbon price, difference between vehicle emissions per mile and fleet average, and average lifetime mileage. - Power sector: tax/subsidize generators based on desired carbon price, difference between generator CO2 per kWh and industry average, and total output. - Other sectors: similar tools for industry, appliances, agriculture; feebates could provide incentives for carbon sequestration (wetlands or forests). *Source: 1usaea2021001 - 36.* ### Box 9. Meeting the U.S. Climate Goals—The Potential Contribution from Agriculture ### Box 9. Meeting the U.S. Climate Goals—The Potential Contribution from Agriculture ### Current emissions and sector profile - During 2019, emissions from U.S. agriculture totaled 669 million metric tons of CO2-equivalent (10 percent of total U.S. emissions or approximately equal to the CO2-equivalent emissions of France and Italy combined). - U.S. agriculture is fossil fuel-intensive and uses a significant amount of chemical fertilizers and pesticides as inputs. - Nearly 80 percent of U.S. agricultural emissions are related to the production of animals and animal feed. - Farm animals and their manure, along with the oil and gas industries, are the leading sources of methane emissions (a pollutant that is shorter-lived than carbon dioxide but far more powerful as a greenhouse gas). - According to the UN Intergovernmental Panel on Climate Change, rapidly reducing methane is the strongest up-front action available to slow global warming and limit its consequences over the near term. ### Policy distortions and sector incentives - Various federal policies—including federal payments to supplement farm income, subsidize loans, duties on imported agricultural products, and crop insurance—create distortions that incentivize the overproduction of high-emission crops and animals. - The Renewable Fuel Standard (requiring transportation fuels to contain a minimum biofuel content) adds to agriculture’s carbon footprint by fostering the expansion of industrially-run, chemically-fertilized corn farms and potentially diverts agricultural capacity away from food production. ### Administration proposals and recommended broader approach - The administration’s plan for Climate Change and Environmental Justice proposes paying farmers to increase the amount of carbon stored in soil (e.g. by supporting no-till agriculture and the planting of cover crops). - A broader, “all-of-government” approach should be considered that examines the full range of federal incentives and restrictions through the lens of their contribution to greenhouse gas emissions. This would support climate goals while offering co-benefits in terms of local communities’ jobs, food justice and public health. ### Potential policy options (as listed) - Phasing out agricultural subsidies that incentivize high-emission farming activities (in a similar vein to the administration’s commitment to phase out federal subsidies for fossil fuel providers). - Designing feebate schemes based on farm output and relative emissions intensity (see Box 8 reference). - Expanding crop insurance subsidies to a broader set of crops and livestock but conditioning them on recipients meeting benchmarks for greenhouse gas emission reductions; benchmarks could, for example, be calibrated to attain a gradual reduction in the number of livestock over time. - Capping federal insurance for larger agricultural producers so that their additional insurance needs would be met through actuarially-fair insurance from private providers. - Targeting subsidies and loans to support fishing and marine farming practices that are compatible with marine biodiversity conservation (such as shallow trawlers and/or regenerative ocean farming). - Providing federal funding for R&D in lower-carbon agricultural practices and to develop more climate-friendly products. *International Monetary Fund — Box 9. Meeting the U.S. Climate Goals—The Potential Contribution from Agriculture* ### 57. The entanglement of trade and currency issues over the last four years represents a ### The entanglement of trade and currency issues over the last four years represents a ### Trade, currency, and multilateral risks - The entanglement of trade and currency issues over the last four years represents a significant risk to the multilateral trade and international monetary systems. - Over the past year, the U.S. has: - undertaken investigations on currency-based countervailing duties for China and Vietnam; - released affirmative findings in a Section 301 investigation of Vietnam’s currency practices, finding evidence of currency undervaluation that harms U.S. workers and businesses. - Risk factors and concerns: - Pending renewal of Trade Promotion Authority could require enforceable currency provisions in all new U.S. trade agreements. - Treating currency undervaluation as a subsidy to be countervailed raises concerns in both finance and trade spheres. - The threat of trade penalties could impinge on monetary policy decisions and discourage exchange rate flexibility, complicating economic surveillance dialogue. - Other countries might adopt similar linkages between trade and currency using their own standards and methodologies, potentially broadening trade restrictions and increasing trade tensions. - Staff recommendation: - Currency-related trade responses should be avoided and enforceable provisions on currency policy should not be attached to U.S. trade agreements. - The U.S. should work constructively with trading partners to address underlying macro-structural distortions affecting external positions. ### Strengthening the rules-based trading system - Need to address longstanding global trade and investment distortions in areas such as tariffs, farm subsidies, industrial subsidies, and services trade. - Recommendation: - The U.S. should work actively with international partners to strengthen the rules-based multilateral trading system. - Renewed engagement at the WTO—including restoring the proper functioning of the dispute settlement system—could facilitate progress. ### Authorities’ views on trade and procurement - Administration objectives: - Ensure a fair international trading system that promotes inclusive and sustainable growth and a rules-based international order. - Use trade policies to help address the global climate crisis, respect the dignity of work, ensure resilient manufacturing supply chains, combat exploitative labor conditions and discrimination, and tackle barriers to free and fair trade. - Judge trade policies by their impact on U.S. workers and communities and ensure they incentivize strong, enforceable labor standards in trading partners. - Actions and reviews: - Comprehensive review of trade tariffs and restrictions is being undertaken. - Policies on currency practices aim to put effective pressures on trading partners intervening in foreign exchange markets. - Review of U.S. statutory authority following an executive order on strengthening “Made in America Laws,” including Buy American provisions; the administration is committed to executing these provisions consistent with existing international obligations. - Stated legal position: - Nothing in the executive order is inconsistent with existing U.S. rights or obligations under international agreements, such as the Agreement on Global Procurement or U.S. free trade agreements. ### Poverty, inequality, and the pandemic’s distributional impact - Pre-pandemic and pandemic-era poverty: - Over 38 million Americans were still living below the poverty line (after accounting for the impact of social assistance programs). - The pandemic hit lower income, lower skilled workers hardest: in March–April 2020, 11½ percent of those without a college degree lost their jobs (more than twice the rate of those with a college degree). - Food insecurity during the early months of the pandemic doubled for the population as a whole, tripling for families with children. - Although CARES Act emergency spending reduced poverty at the start of the pandemic, by March 2021 the poverty rate was around 1 percent above 2019 levels (although has subsequently fallen due to the impact of spending under the American Rescue Plan). - COVID-related health outcomes have been worse for the poorest households (with higher infection and death rates). - Wealth inequality trends: - Over the past 30 years, median household net worth has fallen in real terms for the bottom 40 percent of the income distribution. - Over the same period, the median net worth of the top decile of the income distribution has more than doubled. - The real net worth of the median household was lower in 2019 than it was in 2001. - Wealth inequalities grew further over the past year as asset prices accelerated upwards. - Racial disparities: - Minority households are more likely to live in poorer neighborhoods, send children to under-resourced schools, lack basic health care coverage, face lower socio-economic mobility, be more impacted by climate change, and be victims of violent crime. - Box 11 highlights measurement complexity: - Official poverty measure compares family income to a threshold based on a multiple of the cost of a specific food basket. - Consumption-based measures can (i) capture non-cash benefits; (ii) account for savings; and (iii) be more accurate for lower income households. - Choice of price index for consumption-based measures materially affects measured poverty; some work suggests poverty thresholds should be indexed lower than CPI, while other studies find the bottom quintile faces around 0.4 percentage points higher inflation than the top quintile. ### Policy proposals and recommendations to reduce poverty and increase mobility - Administration proposals: - Increase progressivity of the tax system and expand spending in education, childcare, food assistance, and healthcare targeted at those at the bottom of the income distribution. - American Jobs Plan aims to provide 40 percent of benefits from climate and clean infrastructure projects to disadvantaged communities and invest in affordable transportation for low income families. - Proposed increase in the federal minimum wage to US$15 per hour (prospects for legislation uncertain). - Staff recommendations and scope for reform: - Strengthen social safety nets and increase tax progressivity (particularly by closing loopholes that allow high net worth individuals to avoid taxes on labor income, capital income, and inter-generational transfers). - Simplify federal, state, and local programs to aid the poor and redesign social programs to remove “cliffs” where programs phase out abruptly as household income rises. - To ensure federal tax credits and assistance reach the working poor, there is scope to raise the federal minimum wage. - Many proposed policies mirror recommendations from past consultations. ### Minimum wage and distributional impact - Administration commitment: - Direct a sizable share of resources to historically underserved communities, targeting the “Justice40” goal of delivering 40 percent of the benefits of federal investments to disadvantaged communities. - A US$15 minimum wage would be a powerful tool to raise incomes, reduce poverty and restore social equity. - Empirical note: - Evidence suggests the employment effects of setting the minimum wage at US$15 would be small. ### Governance, anti-corruption, and enforcement - U.S. enforcement of FCPA: - The United States has increased enforcement of the U.S. Foreign Corrupt Practices Act (FCPA) and maintained a prominent role in fighting transnational corruption. - The 2020 Phase 4 Report of the OECD Working Group on Bribery noted that, from the Phase 3 Report in 2010 up to July 2019, 115 individuals and 174 legal persons have been convicted or sanctioned for foreign bribery and related offences in the United States. - Good practices and developments: - Enhanced expertise and resources, enforcement of a broad range of offences, non-trial resolution mechanisms, and published policies incentivizing company cooperation. - Broad use of other statutes to prosecute payments to foreign government officials and intermediaries. - Increasingly addressed the demand side by charging foreign public officials or associates with money laundering or other offences when they use U.S. jurisdiction. - Dodd-Frank Act protections (notably SEC enforcement of anti-retaliation provisions) provide incentives for qualified whistleblowers. - Small facilitation payments remain legal under the FCPA, but awareness of associated risks has increased among authorities and companies. - WGB recommendations and Fund staff view: - WGB recommends further strengthening U.S. efforts against foreign bribery, including enhancing protections for whistleblowers who report suspected acts by non-issuers, evaluating and consolidating enforcement policy and guidance, increasing transparency on Non-Prosecution and Deferred Prosecution Agreements, and applying appropriate AML/CFT obligations to lawyers, accountants, and trust and company service providers related to foreign bribery. - Fund staff agrees with these recommendations and urges authorities to implement them. ### Staff appraisal of macroeconomic stance and policy priorities - Recovery assessment: - The new administration’s policies have put the U.S. economy on a strong footing. - An effective vaccine rollout has put the number of new COVID-19 cases on a firmly downward path. - Unprecedented fiscal support is quickly restoring the economy back to full employment and generating positive outward spillovers to the world economy. - Risks and distributional consequences: - Fiscal support has increased the path for public debt; the current account imbalance has grown; and very accommodative financial conditions have led to increased corporate and nonbank leverage and rising valuations across assets. - The pandemic continues to weigh heavily on those at the lower end of the income distribution, exposing longstanding inequities in access to quality healthcare and education with gender and racial dimensions. - Policy orientation and recommendations: - The administration’s proposed program aims to remake the economy with higher productivity, increased labor force participation, and a less polarized distribution of income and wealth. - To partially fund increased federal spending, plans include closing tax loopholes, raising taxes on corporates and higher income households, remaking the international system for corporate taxes, and fully resourcing the Internal Revenue Service. - A renewed effort is underway to lower carbon emissions and increase resilience to climate change. - Fiscal policy improvements suggested: - Better targeting of policies would strengthen macroeconomic and distributional outcomes. As appropriations proceed, staff suggests: - Phase out tax credits at lower levels of household income; - Prioritize spending toward programs with the biggest impact on productivity, labor force participation, reducing poverty, and facilitating a shift to a low-carbon economy; - Fully eliminate step-up basis, lower the threshold for paying the estate tax, eliminate the 199A passthrough deduction, and reformulate the business tax as a cashflow tax. - Reorienting proposals in these ways would likely imply a slower (but more sustained) demand impulse, a bigger boost to aggregate supply, and lessen near-term risks from a sustained upswing in inflation. - Even with improved targeting, additional medium-term steps will be needed to bring down public debt by raising revenues (through a carbon tax, higher taxation of fuels, and a broad-based federal consumption tax) and lessening the impact of an aging demographic on future spending. - Important uncertainties remain about the final size and composition of proposals given the need to build political consensus. *Source: UNITED STATES — IMF staff report excerpts (pages provided).* ### 72. A tricky task for monetary policy. The Federal Reserve’s actions have been highly effective ### A tricky task for monetary policy. The Federal Reserve’s actions have been highly effective ### Monetary policy: assessment and transition risks - The Federal Reserve’s new monetary framework commits to a near-term overshooting of the 2 percent longer-run inflation goal. - The framework was adopted because of a low neutral rate of interest and the asymmetries posed by the effective lower bound. - The framework has helped support a more rapid recovery from the pandemic and defers the timing of policy normalization. - Ongoing rapid recovery and expectations of additional fiscal support will necessitate a shift in monetary policy in the coming months. - Managing the transition from strong accommodation to scaling back asset purchases and withdrawing monetary accommodation requires deft communications to avoid: - market misunderstandings, - volatility in market pricing, and/or - an unwarranted tightening in financial conditions. ### Safeguarding financial stability - The pandemic revealed shortcomings in the functioning-under-stress of systemically important U.S. markets and institutions. - Serious consideration should be given to structural changes in the operation of: - the Treasury market, - key money markets, and - prime money market funds. - Systemic financial stability risks are described as "close to the historical average" but very accommodative financial conditions are encouraging continued risk taking, fueling asset valuations and facilitating rising leverage in nonbanks and corporates that should be followed carefully. ### External sector: policy recommendations - The pandemic has resulted in a larger current account deficit and left the U.S. external position moderately weaker than the level implied by medium-term fundamentals and desirable policies. - The current account deficit is likely to grow further in 2021. - Recommended policy actions: - Roll back trade restrictions and tariff increases. - Keep “Buy American” provisions tightly circumscribed and consistent with U.S. international obligations. - Avoid currency related trade responses. - Work constructively with trading partners to address macro-structural distortions affecting external positions and to strengthen the rules-based multilateral trading system. - Renew engagement at the World Trade Organization, including restoring the proper functioning of the dispute settlement system. ### Structural transitions and inclusiveness - Simultaneous transitions policymakers must cope with as pandemic effects recede: - an uncertain reshaping of the post-pandemic economy, - transition to a lower carbon economic model, - an increasing role for digitalization and technology, - an underlying shift in U.S. demographics toward an older and more diverse population. - Risks: - These changes could increase income polarization, further hollow out the middle class, and leave behind a material share of the population (particularly lower-skilled, lower-income workers). - Recommended policy approach: - Develop a multi-dimensional policy approach to support rising living standards for all Americans and prevent workers from becoming disenfranchised or detached from the labor force. - Consider investments in social safety nets, healthcare, vocational and academic education, infrastructure, regional development initiatives, subsidies to labor mobility, and immigration policies to meet skills needs. ### Institutional recommendation - It is recommended that the next Article IV consultation take place on the standard 12-month cycle. ### Selected projections and key statistics (high-level) - Real GDP: - 2019: 2.2 - 2020: -3.5 - 2021: 7.0 - 2022: 4.9 - 2023: 1.9 - 2024: 1.7 - 2025: 1.7 - 2026: 1.7 - Unemployment rate: - 2019: 3.7 - 2020: 8.1 - 2021: 5.5 - 2022: 3.5 - 2023: 3.0 - 2024: 3.0 - 2025: 3.1 - 2026: 3.3 - CPI inflation (q4/q4): - 2019: 2.0 - 2020: 1.2 - 2021: 4.8 - 2022: 2.6 - 2023: 2.7 - 2024: 2.6 - 2025: 2.5 - 2026: 2.3 - Core PCE Inflation (q4/q4): - 2019: 1.6 - 2020: 1.4 - 2021: 3.7 - 2022: 2.4 - 2023: 2.6 - 2024: 2.5 - 2025: 2.3 - 2026: 2.1 - Federal balance (% of GDP): - 2019: -4.6 - 2020: -14.9 - 2021: -15.1 - 2022: -8.0 - 2023: -5.7 - 2024: -4.9 - 2025: -4.7 - 2026: -4.5 - Federal debt held by the public (% of GDP): - 2019: 79.2 - 2020: 100.1 - 2021: 104.9 - 2022: 103.7 - 2023: 105.1 - 2024: 106.0 - 2025: 106.8 - 2026: 107.4 - Current account balance (% of GDP): - 2019: -2.2 - 2020: -2.9 - 2021: -3.7 - 2022: -3.7 - 2023: -3.4 - 2024: -3.0 - 2025: -2.7 - 2026: -2.5 ### Risk Assessment Matrix — selected risks and policy responses - Global resurgence of the COVID-19 pandemic - Likelihood: Medium - Expected Impact if Risk Materializes: High - Policy response: Fiscal support for public health response; monetary policy remain accommodative (asset purchases, forward guidance, emergency credit facilities). - Disorderly transformations (impeded reallocation) - Likelihood: Medium - Expected Impact if Risk Materializes: High - Policy response: Invest in social safety nets, healthcare, education, infrastructure; consider regional development, labor mobility subsidies, immigration to meet skills needs. - Widespread social discontent and political instability - Likelihood: High - Expected Impact if Risk Materializes: Medium - Policy response: Improve social safety net, support unemployed, increase healthcare resources and preparedness, ensure broad access to affordable, quality health care. - De-anchoring of inflation expectations - Likelihood: Medium - Expected Impact if Risk Materializes: High - Policy response: Accelerate reduction in asset purchases and consider raising policy rates before net purchases are brought to zero if de-anchoring occurs. - Rising vulnerabilities in the U.S. corporate sector (leveraged loans, high yield, private debt) - Likelihood: Medium - Expected Impact if Risk Materializes: High - Policy response: Emergency liquidity support to curtail market dysfunction; limits on dividend distributions and buybacks; macroprudential tools for nonbanks. - Supply and demand mismatches leading to persistent inflation - Likelihood: Medium - Expected Impact if Risk Materializes: High - Policy response: Fiscal measures to incentivize labor market return; monetary policy look-through on transitory inflation but monitor for de-anchoring. *IMF staff assessment as presented in the source content.* ### Appendix II. Public Debt Sustainability Assessment ### Appendix II. Public Debt Sustainability Assessment ### Overview and key judgment - Due to the unprecedented fiscal response to the COVID-19 outbreak, the U.S. budget deficit increased considerably in 2020 and is expected to stay elevated in 2021. - Under the baseline scenario, public debt is projected to stabilize over the medium term as gradually materializing spending under the American Jobs and Families Plans is offset by the implied boost to potential growth. - Age-related spending pressures on entitlement programs will gradually push debt up over the long-run. - Gross financing needs are large, albeit manageable given the global reserve currency status of the U.S. dollar. - A credible medium-term fiscal adjustment featuring reprioritization of budget programs and revenue-gaining tax reform is needed to put public debt on a downward path. - Risks of debt distress are low and debt is viewed as sustainable. ### Background and baseline projections - Fiscal expansion in response to COVID-19 was unprecedented; fiscal deficits are projected to stay elevated in the near term. - Staff baseline is based on current and likely to be passed laws. - Federal debt held by the public is projected to increase from about 100 percent of GDP in FY2020 to around 111 percent of GDP in 2030. - General government gross debt is projected to rise from about 134 percent of GDP in FY2020 to 138 percent of GDP in 2030. - Under the baseline, public debt is projected to rise further in 2021 reflecting automatic and discretionary fiscal responses that are only partially offset by robust growth, remain elevated in the medium term, and begin rising gradually after 2027 as age-related entitlement pressures assert themselves. ### Adjustment scenario and fiscal targets - General government primary deficit: 12.6 percent of GDP in 2020; projected at 11.8 percent of GDP in 2021. - Medium-term adjustment needed: gradually raising the primary general government surplus to around ½ percent of GDP (1 percent of GDP for the federal government) would be necessary to return the debt-to-GDP ratio to a lower path. - A larger primary surplus would be required to bring the debt ratio closer to pre-Great Recession levels by 2030. ### Debt servicing and interest-growth dynamics - Fiscal projections benefit from a favorable interest rate-growth differential, reflecting accommodative monetary policy and the safe-haven status of the United States. - Effective nominal interest rate projected to rise gradually from the projected level of 1.6 percent in 2021 to 2.7 percent by 2030 (close to its 2010–18 average level). - Thus, real interest rates will act as a debt-reducing flow over the medium-term. ### Realism of baseline assumptions - Baseline economic assumptions are generally within the error band observed for all countries. - Baseline fiscal projections and implied near-term adjustment are outliers compared with historical and cross-country experience but are considered realistic given the large but temporary fiscal expansion in response to the pandemic. ### Stress tests and sensitivity analysis - Public debt dynamics are sensitive to growth and interest rate assumptions. - An increase of 100 basis points in the sovereign risk premium would raise the public debt ratio to about 141 percent of GDP by 2030 (about 3 percentage points of GDP above the baseline). - If real GDP growth were one standard deviation below the baseline, the public debt ratio would increase by about 7 percentage points above the baseline by 2030. - 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 2030. - A combined macro-fiscal shock could raise the public debt ratio to as high as 154 percent of GDP by 2030. - 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. ### Mitigating factors - The depth and liquidity of the U.S. Treasury market and its safe-haven status mitigate risks associated with high external and gross financing requirements. ### External sector and selected balance-sheet indicators (2020) - NIIP: −67.3 percent of GDP. - Gross Assets: 153.6 percent of GDP. - Reserve Assets: 3.0 percent of GDP. - Gross Liabilities: 220.9 percent of GDP. - Debt Liabilities: 102.6 percent of GDP. - About 60 percent of U.S. assets are in the form of FDI and portfolio equity claims. - Financial stability risk: moderate risk of an unexpected decline in foreign demand for U.S. fixed-income securities, but mitigated by the dollar’s dominant reserve status. ### Current account and external position (2020) - Current Account (CA): −3.1 percent of GDP. - Cyclically Adjusted CA: −2.8 percent of GDP. - EBA Norm: −0.5 percent of GDP. - EBA Gap: −2.3 percent of GDP. - COVID-19 Adjustor: 0.5 percent of GDP. - IMF staff gap (Staff Gap): −1.8 percent of GDP. - The CA deficit increased from 2.2 percent of GDP in 2019 to 3.0 percent in 2020 (2.0 to 2.7 in cyclically adjusted terms). - The CA deficit is expected to remain above 2 percent of GDP over the medium term. *Source: IMF staff (Appendix II. Public Debt Sustainability Assessment).* ### 3.9 percent compared to the 2020 average. ### 1usaea2021001 - 3.9 percent compared to the 2020 average. ### REER Assessment - Indirect estimates of the REER (based on the IMF staff CA assessment) imply that the exchange rate was overvalued by 8.8 percent in 2020 (applying the estimated elasticity of −0.2). - The EBA REER index model suggests an overvaluation of 8.3 percent. - The EBA REER level model suggests an overvaluation of 12.4 percent. - Considering all the estimates and their uncertainties, the IMF staff assesses the 2020 average REER to be somewhat overvalued, in the 5.8–1 1.8 percent range, with a midpoint of 8.8 percent. ### Capital and Financial Accounts: Flows and Policy Measures - Background: - The financial account balance was about −3.7 percent of GDP in 2020 compared with −1.8 percent of GDP in 2019. - An increase in net direct investment (0.5 percent GDP) was offset by decreases in net portfolio investments (0.8 percent GDP) and other net investments. - Assessment: - The United States has an open capital account. - Vulnerabilities are limited by the dollar’s status as a reserve currency, with foreign demand for US Treasury securities supported by the status of the dollar as a reserve currency and, possibly, by safe haven flows. ### FX Intervention and Reserves Level - Assessment: - The dollar has the status of a global reserve currency. - Reserves held by the United States are typically low relative to standard metrics. - The currency is free floating. ### FSAP Recommendations — Systemic Risk Oversight and Macroprudential Framework - Footnote: - This annex contains the U.S. authorities’ self-assessment of the status of implementation of the recommendations of the 2020 FSAP and is not necessarily the assessment of IMF staff. - Recommendation: Provide an explicit financial stability mandate to all federal FSOC members. - Status: This legislative recommendation has not been implemented. - Implementation status: Not Implemented - Recommendation: Prioritize the development of macroprudential tools to address risks and vulnerabilities in the nonbank sector. - Developments: - During the March 31st Council meeting, the Secretary identified risks related to nonbank financial intermediation as one of the priorities for the Council going forward. - It is important to assess the risks posed by open-end mutual funds and money market funds given that those risks materialized during last spring’s market stress. - On open-end funds, the Secretary called for an interagency assessment to determine if additional measures should be taken to address the financial stability vulnerability associated with open-end funds, and, if so, to develop recommendations for the FSOC. - On money market funds, the Secretary has stated that it is encouraging that regulators are considering substantive reform options for money market mutual funds, and that she supports the SEC’s efforts to strengthen short-term funding markets. - The Secretary also announced the reestablishment of the FSOC Hedge Fund Working Group to help share data, - Implementation status: Partially Implemented *Source: 1usaea2021001 - 3.9 percent compared to the 2020 average.* ### Appendix IV. Implementation of 2020 FSAP Recommendations ### Appendix IV. Implementation of 2020 FSAP Recommendations ### Summary of implementation status (selected recommendations) - Implemented - OFR rule 12 CFR Part 1610 on ongoing data collection of centrally cleared transactions in the U.S. repurchase agreement market; data collection began in October 2019. OFR launched its Short-Term Funding Monitor in September 2020 integrating centrally cleared repo data with triparty repo data (public API). - On December 28, 2020, Congress approved additional resources to the CFTC. - The FOMC instructed the Desk to: undertake OMOs as necessary to maintain the federal funds rate in a target range of 0 to 1/4 percent; increase SOMA holdings of Treasury securities by $80 billion per month and of agency mortgage-backed securities (MBS) by $40 billion per month. - The AML Act of 2020, which includes the Corporate Transparency Act, was enacted on January 1, 2021, requiring reporting companies to disclose beneficial owners on formation and when they change beneficial owners. - The FDIC and FRB continue to co-chair annual CMG meetings; FBAs continue to review RRPs; FDIC building out process documents to implement Title II resolution. - Fully Implemented (with qualifiers) - SEC adopted final broker-dealer capital and segregation rules addressing Title VII requirements on June 21, 2019 (compliance date October 6, 2021). - Collaboration and implementation of robust risk management standards across regulators for CCP oversight described as "Fully Implemented with regard to collaboration and implementation of robust risk management standards." - Partially Implemented - Streamlining regulatory requirements and many supervisory reforms noted as "No material developments to report" or "Partially Implemented" depending on item. - Joint supervisory stress tests of CCPs: preparatory work began in 2019; progress delayed by COVID-related resource diversion; engagement will resume. - SEC actions on money market funds: published request for comment (2021); June 11, 2021 noted forthcoming work on money market funds in its Annual Regulatory Agenda. - Development of Consolidated Audit Trail: SROs charged with development; CAT Implementation Plan filed July 22, 2020 (quarterly progress reports available). - Increase scrutiny of new registrants and reduce reliance on self-attestations: Division of Examinations considers newly registered status a risk factor; NFA risk assessment/model used for newly registered CPOs. - Federal Reserve outreach and work to develop backup plans if Bank of New York Mellon (BNYM) cannot settle and clear repo transactions; discussions to form a working group of market participants and infrastructures underway. - FSOC continuing interagency efforts to address vulnerabilities in U.S. Treasury securities market and enhance interagency data sharing on hedge fund risks. - Not Implemented - Review prudential requirements for non-internationally active banks (Category III and IV) and consideration of extending full LCR. - Introduce heightened standards on governance of large and complex BHCs, related-party framework enhancements, concentration risk rules, and quantitative standards for interest rate risk in the banking book. - Increase independence of state insurance regulators; require all in-force life insurance business be moved to principles-based reserving (PBR) after a five-year transition; recalibrate RBC to revised valuation approach. - Develop a consolidated group capital requirement similar to ICS; no U.S. regulator intends to adopt the ICS in its current form. - Give CFTC and SEC greater independence to determine their own resources (legislative recommendation not implemented). - Advance arrangements for providing liquidity to systemic nonbanks and CCPs under stress, and reconsider restrictions on bilateral ELA to designated systemically important nonbanks (no changes since FSAP). - Enhance arrangements to provide liquidity support in foreign currencies to banks and designated systemically important CCPs (no changes since FSAP). - Extend OLA powers to cover FBOs’ U.S. branches; ensure equal depositor preference ranking for overseas branch deposits with domestic deposits; introduce powers to give prompt and predictable legal effect to foreign resolution measures. - Continue to use agency discretion to subject a wider array of firms to RRP (no material developments). ### Banking regulation and supervision - Staff findings and authorities’ response: - Authorities emphasize "tailoring" of enhanced requirements to risks specific banks pose (asset size, cross-jurisdictional activity, reliance on short-term wholesale funding, off-balance sheet exposures). Authorities disagree with subjecting non-internationally active banks to G-SIB requirements as "disproportionate to their lower risk." - Status items (preserve exact wording where given): - "No material developments to report" for review of prudential requirements for Category III and IV banks. - "No material developments to report" for streamlining regulatory requirements and converting guidance to regulation. - Several governance and concentration risk recommendations listed as "Not Implemented." ### Insurance regulation and supervision - Key points: - Recommendation to increase independence of state insurance regulators: "Not Implemented." Authorities note commissioner selection determined by state legislatures; reforms at state government level beyond individual departments’ purview. - Move all in-force life insurance business to PBR after five-year transition: "Not Implemented." Authorities cite significant effort required and legal/state constraints; PBR applies only to new business for several reasons listed (formulaic reserves conservatism, whole life exemptions, term product duration, state law on valuations). - Develop a consolidated group capital requirement similar to ICS: "Not implemented." FRB and NAIC developing aggregation approaches; IAIS developing Aggregation Method and high-level principles; no U.S. regulator intends to adopt ICS in its current form. ### Regulation, supervision, and oversight of FMIs (CCPs) - Implemented / Partially Implemented actions: - CFTC resource increase: Congress approved additional resources on December 28, 2020. - FRB, SEC, and CFTC have implemented regulatory frameworks mandated by Title VIII of the Dodd-Frank Act consistent with the PFMI; authorities coordinate on examinations and reviews of proposed framework changes. - Preparatory work for joint supervisory stress testing of CCPs began in 2019; progress delayed by COVID-19; engagement will resume. CFTC led a multi-agency default drill simulating default and liquidation of a large clearing member during extreme market stress. - CFTC co-chairing an international working group on effects of margin demands during extreme market stress in March and April 2020. - U.S. FSAP Technical Note: "FMIs appeared so far sufficiently robust to manage surges in volumes and volatility in financial markets during the COVID-19 crisis." ### Securities regulation and supervision - Actions and status: - SEC broker-dealer capital rules adopted June 21, 2019; compliance date October 6, 2021 (Fully Implemented as of October 6, 2021). - Market-wide circuit breakers operate on a pilot basis expiring October 19, 2021 unless extended; MWCB triggered four times in March 2020; SEC and industry assessments underway (Partially Implemented). - Consolidated Audit Trail: SROs charged to build CAT; Implementation Plan filed July 22, 2020 (Partially Implemented). - SEC published request for comment on money market funds (link cited in source); noted forthcoming work on money market funds in June 11, 2021 Annual Regulatory Agenda (Partially Implemented). - Recommendation to give CFTC and SEC greater independence to determine their own resources: "Not Implemented." - Increase scrutiny of new registrants and reduce reliance on self-attestations: Partially Implemented—Divisions and NFA consider newly registered status among risk factors and use risk-assessment tools for examination selection. ### AML/CFT - Implemented - AML Act of 2020 / Corporate Transparency Act enacted January 1, 2021: reporting companies must disclose beneficial owners on formation and upon change. - Partially Implemented - Ensuring investment advisers, lawyers, accountants, and company service providers are effectively regulated and supervised for AML/CFT: FATF Third Follow-Up to the U.S. Mutual Evaluation assessed progress; U.S. will continue engagement with FATF to address identified gaps. ### Systemic liquidity - Findings and status: - Promote fungibility of Treasury Securities and Reserves by adjusting assumptions about firms’ access to the Discount Window in liquidity metrics: "No changes have been made since the FSAP was conducted." (Not Implemented) - Continue to operate regular fine-tuning OMOs: Authorities state "fine-tuning or reserve management OMOs are not needed" in the current environment; FOMC instructions include maintaining federal funds rate target range 0 to 1/4 percent and the $80 billion/$40 billion monthly purchases (Implemented). - Increase holdings of Treasury securities and agency MBS by additional amounts and purchase agency CMBS as needed; conduct repo operations to support effective policy implementation—policy in place since December 2020 (Implemented). - Advance arrangements for providing liquidity to systemic nonbanks and CCPs and reconsider restrictions on bilateral ELA: "No changes have been made since the FSAP was conducted." Federal Reserve can provide liquidity through Section 13(3) broad-based facilities; for FSOC-designated systemically important CCPs, Federal Reserve authorized to provide bilateral liquidity in unusual or exigent circumstances; recommendation to reconsider restrictions should be directed to Congress (Not Implemented). - Develop robust backup plans should BNYM be unable to settle and clear repo transactions: Federal Reserve outreach conducted; market participants showed interest; discussions started to form a working group to develop and implement plans (Partially Implemented). - Enhance arrangements to provide liquidity support in foreign currencies to banks and designated systemically important CCPs: "No changes have been made since the FSAP was conducted." (Not Implemented) ### Crisis preparedness and management - Key activities and status: - FSOC created after 2008 crisis to identify threats and promote market discipline; not intended as the primary responder but a venue for information sharing and coordination. - Authorities argue crisis preparedness processes are "sufficiently robust" based on spring 2020 market stress response; FSOC and FBAs engaged in interagency and cross-border crisis preparedness, trilateral work with U.S., UK, and European authorities, and CMG meetings for G-SIBs (Partially Implemented / Implemented items described). - Continue to use agency discretion to subject a wider array of firms to RRPs: "No material developments to report." (Not Implemented) - Continue to undertake yearly DFA Title II plans, resolvability assessments, and CMG discussions: FBAs continue to review RRPs with increasing focus on testing firms’ capabilities; FDIC and FRB co-chair annual CMG meetings; FDIC building out strategic planning and process documents to facilitate Title II implementation (Implemented). ### Fund relations and statistical issues (selected exact figures and dates) - Fund relations: - Prepared by The Western Hemisphere Department (in consultation with other departments). - Document date: July 6, 2021. - Article IV Consultation concluded on July 19, 2021; staff report published as IMF Country Report No. [21/xxx]. Article IV discussions took place during June 7 – June 23, 2021. Concluding meetings with Chair Powell and Secretary Yellen occurred on July 1. - Team comprised Nigel Chalk (head), Anke Weber, Katharina Bergant, Andrew Hodge, Li Lin, Rui Mano, Andrea Medici, Yannick Timmer (all WHD), Mico Mrkaic and Elizabeth Van Heuvelen (SPR). Ms. Elizabeth Shortino (Acting Executive Director) and Mr. Logan Sturm (Advisor) attended some meetings. - Financial and membership statistics (preserve exact values) - Quota: 82,994.20 SDR Million (100.00 percent of Quota) - IMF's Holdings of Currency (Holdings Rate): 60,068.51 SDR Million (72.38 percent of Quota) - Reserve Tranche Position: 22,964.17 SDR Million (27.67 percent of Quota) - New Arrangements to Borrow: 797.03 SDR Million - SDR Department net cumulative allocation: 35,315.68 SDR Million (100.00 percent of Allocation) - SDR Department Holdings: 36,766.85 SDR Million (104.11 percent of Allocation) - Projected payments to Fund—Charges/Interest: 0.59 (SDR Million) for 2021, 2022, 2023, 2024, 2025 (listed individually as 0.59 each). - Statistical issues (as of June 30, 2021) - General: Comprehensive economic data available on timely basis; data provision adequate for surveillance. - United States adherent to SDDS Plus since February 18, 2015; latest SDDS Plus Annual Observance Report posted on DSBB. No data ROSC has been conducted. - Table of Common Indicators (as of July 6, 2021): selected entries (date of latest observation / date received / frequency all preserved in source) - Exchange rates: Same day / Same day / D D D - International reserve assets and reserve liabilities of the monetary authorities: 2021 M5 Jun 30 / M M M - Reserve/base money: 2021 M5 Jun 22 / M M M - Broad money: 2021 M5 Jun 22 / M M M - Central bank balance sheet: Jul 1 / Jul 1 / W W W - Consolidated balance sheet of the banking system: 2021 Q1 Jun 11 / Q Q Q - Interest rates: Same day / Same day / D D D - Consumer price index: 2021 M5 Jun 10 / M M M - Revenue, expenditure, balance and composition of financing—general government: 2021 Q1 Jun 24 / Q Q Q - Revenue, expenditure, balance and composition of financing—central government: 2021 M5 Jun 10 / M M M - Stocks of central government and central government-guaranteed debt: 2021 M6 Jun 30 / M M M - External current account balance: 2021 Q1 Jun 23 / Q Q Q - Exports and imports of goods and services: 2021 M5 Jul 2 / M M M - GDP/GNP (1st release): 2021 Q1 Apr 29 / Q M M - Gross External Debt: 2021 Q1 Jun 30 / Q Q Q - International Investment Position: 2021 Q1 Jun 30 / Q Q Q ### Statement by Ms. Shortino (Executive Director) — key policy positions and economic outlook (exact quotations and numeric values preserved) - Vaccinations and pandemic: - "To date, almost 58 percent of adults are fully vaccinated." - Growth expectations: - "The Administration expects growth to be largely in line with the IMF forecast of around 7 percent in 2021 and just under 5 percent in 2022." - Fiscal policy: - American Recovery Plan described as helping households and businesses; targeted support elements listed (child tax credit, block grants to state-and-local governments, eldercare, subsidies for childcare). - American Jobs Plan and American Families Plan characterized as public investments rather than stimulus. - Monetary policy: - FOMC announced modified framework in August 2020 (Flexible Average Inflation Targeting); maintaining target range for federal funds rate at 0 percent to 0.25 percent as of June. - FOMC will not raise the federal funds rate target range "until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time." - Financial stability and international policy: - U.S. authorities emphasize past reforms (Dodd-Frank Act) improved resilience; banks are "well-capitalized and sufficiently liquid," stress tests completed for largest firms. - U.S. pledged to share "580 million vaccine doses internationally, to be allocated to 92 lower-income nations selected by COVAX." - Current account comment: U.S. current account deficit "is likely to widen in the near term" due to strong U.S. growth relative to major trading partners. - Climate change and inequality: - U.S. returned to the Paris Agreement; Administration announced enhanced NDC and policy actions including inclusion of climate-friendly investments in American Jobs and Families Plans. - Administration's equity agenda and targeted measures highlighted; American Rescue Plan cited as having changed the course of the pandemic for many under-privileged members of the country. *Source: Appendix IV. Implementation of 2020 FSAP Recommendations; United States staff report materials and Statement by Ms. Shortino (July 6–19, 2021).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1usaea2021001.pdf_