## 1usaea2022001

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### U.S. sanctions on Russia and Belarus — overview and specific measures
- Since February, the U.S. and over 30 other countries have imposed economic sanctions and export-controls on a large number of Russian and Belarussian individuals, companies, and financial institutions.
- Expected effects of the war and sanctions:
  - Reduce global growth in 2022.
  - Increase commodity prices.
  - Disrupt trade and financial linkages.
  - Test financial system resilience via direct and indirect exposures, commodity market disruptions, increased counterparty risk, acceleration of cryptoization, and possible cyber-related events.
- Specific U.S. measures (high level):
  - Asset freezes/financing restrictions: prohibition for U.S. persons to transact with the Central Bank, the National Wealth Fund, and the Ministry of Finance of the Russian Federation; prohibition on transactions by U.S. persons in new debt with maturity > 14 days or new equity of certain Russian state-owned enterprises and financial-sector entities.
  - SDNs and Blocked Persons: U.S. persons prohibited from dealing with SDNs; assets of SDNs in the U.S. or coming into possession of U.S. persons must be blocked; entities 50 percent or more owned by blocked persons are also blocked.
  - Import restrictions: Imports to the U.S. of Russian petroleum, natural gas and coal products and certain other Russian-origin goods (seafood, alcoholic beverages, non-industrial diamonds) are prohibited.
  - Export restrictions: Wide-ranging restrictions on goods, software and technology to Russia/Belarus, including re-exports and foreign-made items with U.S. content; prohibition on accounting, management consulting, trust and corporate formation services by U.S. persons; ban on U.S. dollar denominated banknotes to the Russian government or any person in Russia.
  - Investment restrictions: New investments from the U.S. or by a U.S. person, wherever located, in any sector of the Russian economy are prohibited.
  - Airspace and port closures: Russian air carriers and Russian-owned aircraft banned from U.S. territorial airspace (with some exceptions); Russian-affiliated vessels prohibited from entering U.S. ports.
  - General Licenses: Authorizations for certain exports (agricultural commodities, medicine, medical devices).
  - Some measures constitute capital flow management measures for national or international security reasons.

### Macro-financial and domestic context and implications
- Public health and macro backdrop:
  - "71 percent of the eligible population have been fully vaccinated and around one half have received a booster shot."
  - "The U.S. has now passed a tragic landmark of 1 million dead from COVID-19 and daily deaths remain in the hundreds."
  - Within 24 months of the COVID-19 shock, unemployment and other labor underutilization measures returned to end-2019 levels; output close to pre-pandemic trend.
  - "Median PCE inflation continues to rise"; rapid increases in shelter, healthcare and other services inflation; food and energy prices rising further due to the Russian invasion of Ukraine.
  - "The overall general government deficit rose by close to 9 percent of GDP during the pandemic."
  - "The US$1.9 trillion American Rescue Plan—passed in March 2021—slowed the pace of fiscal contraction in 2021-22 but did not forestall it."
  - "The real exchange rate is now around 5 percent more appreciated than in 2021."
- Expected external effects reiterated: reduce global growth in 2022, increase commodity prices, disrupt trade and financial linkages, test financial system resilience.

### Financial stability vulnerabilities and market fragilities
- Financial conditions: Rapid tightening amid uncertainty from the Russian invasion of Ukraine.
- Corporate sector:
  - Corporate leverage "remains close to the high levels seen prior to the pandemic", with sizable and increasing corporate cash buffers and lengthening in the duration of corporate debt.
  - Heterogeneity across sectors/firms could reveal pockets of stress if conditions tighten further.
- Market and institutional fragilities:
  - Fixed income markets have shown insufficient resilience under stress.
  - Money, repo, and Treasury markets may be overly reliant on unprecedented liquidity.
  - Prime and tax-exempt money market funds and dollar-denominated offshore funds remain subject to runs; some bond funds hold significant illiquid assets.
- Nonbank entities and markets:
  - Leverage among hedge funds and life insurers is high; life insurers have decreased holdings of liquid assets and rely more on short-term funding.
  - Issuance of securitized instruments—particularly auto-linked—has risen.
- Digital assets:
  - Rapid sector growth and selling pressures highlight fragility and opacity.
  - Several prominent stablecoins marketed as convertible to U.S. dollars are backed by illiquid or value-vulnerable assets, making them vulnerable to run risk.
  - Some stablecoin providers experienced large redemptions and lost their U.S. dollar peg.
  - Other crypto-assets experienced significant price volatility; not currently viewed as systemic.
- Housing:
  - "Nationwide, average prices are 38 percent above where they were at end-2019."
  - Leverage contained by low loan-to-value ratios and conservative underwriting; refinancing reduced average mortgage payments to all-time lows as a share of disposable income.
  - Financial stability risks from housing appear contained; affordability has worsened, especially for lower income households.

### Policy gaps, IMF recommendations, and authorities’ actions
- Outstanding FSAP recommendations (selected):
  - Ensure each Financial Stability Oversight Council member has an explicit financial stability objective.
  - Close data gaps.
  - Finalize arrangements for market-wide circuit breakers and provide greater budgetary autonomy for the SEC and CFTC.
  - Review prudential requirements for category III and IV banks to ensure Basel consistency.
  - Strengthen CCP risk management consistency.
  - Subject mutual funds to SEC-led liquidity stress tests.
  - Develop consolidated group capital requirement for insurance companies.
  - Deploy macroprudential tools to improve system resilience.
- Authorities’ views/actions:
  - Markets have experienced large fluctuations and some deterioration of liquidity, but have generally functioned well and key funding markets have been resilient.
  - Households and businesses have decreased borrowing as a share of GDP; interest coverage ratios improved.
  - Banks maintain capital ratios well above regulatory minima and are very liquid with less reliance on wholesale funding.
  - Substantial work underway to strengthen data collection on hedge funds, uncleared bilateral repos, liquidity and redemption features of open-end funds, and to improve money market fund resilience.

### Outlook and near-term dynamics (U.S. momentum)
- Growth:
  - "Growth is expected to fall to 0.7 percent q4/q4 by end-2023 and then pick up gradually into 2024."
  - The U.S. "is expected to narrowly avoid a recession", but risk of "stalling" or a short-lived downturn is significant.
- Consumption and savings:
  - Consumption will remain the driver of near-term growth; household savings overhang "is estimated to be equivalent to around 14 percent of annual consumption."
- Inflation:
  - "PCE inflation is expected to fall steadily ... reaching 2 percent on a year-on-year basis by end-2023."
- Downside risks:
  - Main downside: abrupt tightening in financial conditions triggered by upside inflation surprises (Ukraine escalation, China shutdowns, shift in inflation expectations, nominal wage acceleration, inertia in realized inflation).
  - Resurgence of COVID-19 is an additional downside risk.
  - Negative shocks could turn slowdown into a short-lived recession.

### U.S. oil sector reaction (Box 2 summary)
- Hydraulic fracturing production can be ramped up faster than elsewhere.
- Investment response: "a 10 percent increase in oil and gas prices adds around 2.5 percent to U.S. oil and gas investment in the first year and a cumulative 5 percent after two years."
- Lead time from investment to production: "roughly 6 months for shale oil and gas."
- Industry expectations/constraints:
  - Contacts expect capital spending to grow around "5–10 percent in 2022 and 2023."
  - Public companies typically re-invest only "30–50 percent of their free cash flow into new projects."
  - Labor and equipment shortages and ESG-related capital constraints noted.
- Natural gas export constraints:
  - New LNG terminals take "2 or more years" to come online even with contracts and expedited approvals.
  - LNG export capacity expected to grow by "18 percent this year" and could possibly double by 2030 (based on already-approved projects).

### Wage and price pressures; labor market dynamics
- Wage developments:
  - Nominal wages accelerated rapidly in late-2021; fastest since early-1980s in some metrics.
  - "The nominal wages of the lowest two deciles are now 12 percent above pre-pandemic levels."
  - "The wage for the median worker is 10 percent higher than pre-pandemic."
- Labor market dynamism:
  - Job-to-job transitions now exceed pre-pandemic levels.
  - Vacancies to unemployment ratio "is at the highest level since 2000."
  - High quits, openings, and hiring concentrated in leisure and hospitality.
- Inflation dynamics:
  - Acceleration in nominal wages accompanied broadening of price pressures; median PCE inflation overlapped with median wage rises at end-2021.
  - Two-way wage-price feedback has been relatively weak to date.

### Monetary policy stance, transmission, and communication
- Policy action needed:
  - Rapid withdrawal of monetary accommodation required to address broad-based wage and price inflation.
  - Model simulations indicate inflation back to 2 percent requires ex-ante real policy rate above neutral (neutral calibrated here as "0.5 percent in real ex ante terms") and staying above neutral for at least one year.
  - Staff baseline uses the median projection for the federal funds rate published at the June FOMC meeting; that path would push ex ante real policy rate above zero by late-2022 and bring inflation back to 2 percent by late 2023/early 2024.
  - If wage/price inertia is greater, a tighter stance may be needed, possibly causing higher unemployment and a short recession.
- Fed balance sheet:
  - "The Fed’s balance sheet should be quickly pared back as communicated in the May FOMC meeting."
  - Balance sheet run-off likely to have relatively small impact on monetary conditions; federal funds rate changes must remain primary tool.
- Communication recommendations:
  - Recommend Fed publish, at each policy meeting, an internally-consistent economic projection and rate path produced by Fed staff, supplemented with alternate quantified scenarios.
  - Fed could clarify how its policy framework applies when inflation is well above two percent.

### Monetary policy paths (Box 4 simulations)
- Overview: Three simulated paths in the FRBUS model — Average inflation targeting, Optimal control, Stickier expectations formation.
- Average inflation targeting:
  - "Increase in the federal funds rate by around 100bp each year in 2022–24."
  - Inflation reaches 2 percent in 2026; ex ante real rates remain below neutral until 2024.
- Optimal control:
  - "Increases policy rates around 300bp by end-2023 and a further ½ percent in 2024."
  - Ex ante real rates rise above neutral in 2023 H1; brings inflation back to target in 2024; lowers growth to "1.5 percent in 2025"; causes unemployment to rise marginally above "4 percent."
- Stickier expectations formation:
  - A more front-loaded federal funds rate needed, "peaking at close to 4 percent."
  - Returns inflation to target over a longer timeframe; unemployment rises above "4 percent in early 2024", remaining at "4–4¼ percent" over the medium term.
- Caveat: Outcomes sensitive to parameters and expectations formation assumptions.

### Financial stability and market plumbing vulnerabilities — suggested mitigants
- Risks: tightening policy and fiscal withdrawal will tighten financial conditions and restrain demand; complexity of monetary transmission includes nonbank channels.
- Market plumbing mitigants recommended:
  - Introduction of standing facilities for primary dealers and foreign and international monetary authorities (already underway).
  - Consider central clearing for the Treasury market.
  - Modify supplementary leverage ratio to allow increased dealer intermediation capacity.
  - Move all money market funds to a floating net asset value.
  - Consider more binding (possibly countercyclical) liquid asset requirements.
  - Subject asset management vehicles to annual liquidity stress tests.
  - Institute pre-determined arrangements to lock-in a proportion of investor shares during unusual outflows.
  - Provide for in-kind redemptions for institutional investor withdrawals.
  - Allow swing pricing or temporary gates on outflows.

### Fiscal strategy and deficit reduction
- Key quantitative target:
  - "A 1 percent of GDP general government primary surplus would be sufficient to put the public debt-GDP ratio on a downward path by the end of this decade."
- Policy options to achieve medium-term general government primary surplus:
  - Scale back poorly targeted tax expenditures (exemptions for employer-provided health care, individuals selling principal residence, mortgage interest, state and local taxes).
  - Phase in a federal consumption tax and/or a carbon tax with well-designed assistance to protect the poor.
  - Reduce imbalances in the social security system.
  - Contain health care costs.

### Trade, supply chains, and climate transition
- Trade policy:
  - Roll back tariffs and trade distortions introduced over the past 5 years (including steel, aluminum, and products from China) to support growth and reduce inflation.
  - Complement with worker training, apprenticeship programs, and infrastructure development.
  - Engage multilaterally to address tariffs, subsidies, and services trade; strengthen WTO engagement.
- Supply chain resilience:
  - Establish interagency Supply Chain Disruptions Task Force; consider legislation to support domestic investment in specific products/technologies.
  - Best practices: diversify input sourcing, improve infrastructure/logistics/information systems, reduce trade costs.
  - Caution: Avoid policies that unduly favor domestic producers or fragment global trading system.
- Climate transition:
  - Infrastructure Investment and Jobs Act provisions and other executive actions support EV charging, energy efficiency, methane reduction, and grid upgrades.
  - Recommended policy mix: broad-based carbon pricing, sectoral feebates, regulatory actions, elimination of fossil fuel subsidies, incentives for renewables and EV adoption.
  - Transition must address labor reallocation and skills mismatches; training and financial support for affected workers recommended.
  - Subnational reductions in gasoline taxation judged counterproductive; targeted support to vulnerable households preferred.
  - Expansion of fossil fuel exports should be coupled with strict environmental regulations (e.g., penalties for methane leaks/flaring).

### Labor market and green transition evidence (Box 8)
- Geographic/occupational patterns:
  - "72 percent of commuting zones that are rich in pollution intensive jobs are either also rich in green jobs or border a commuting zone that is."
- Transition probabilities:
  - Probability of transitioning into a green job: "around 15 percent" for workers in polluting jobs; "around 45 percent" for workers already in a green job.
- Historical regulatory transitions:
  - In zones where Clean Air Act regulations become more binding, employment shifts out of polluting industry occur without significant net employment loss in the commuting zone.

### Governance, anti-corruption, and AML/CFT developments
- Strengths:
  - U.S. effective at investigating/prosecuting money laundering and cooperating internationally; confiscating and returning assets from foreign corruption.
- Shortcomings:
  - Entity transparency and preventive measures (including PEP identification) insufficient; gatekeepers (lawyers, accountants, trust and company service providers) not fully subject to customer due diligence and suspicious transaction reporting.
  - Money laundering risks in high-end real estate; real estate agents not subject to comprehensive AML/CFT requirements.
- Ongoing initiatives:
  - Corporate Transparency Act (CTA) enacted to create a government-maintained beneficial ownership registry for certain companies.
    - Proposed rules: companies created/registered after requirements effective would have "14 days after formation" to file; companies formed before effective date would have "a year" to file initial reports.
    - Beneficial ownership information available to FinCEN and shareable with federal/state agencies and competent authorities from other countries; with company consent, shareable with financial institutions.
  - Treasury actions: Geographic Targeting Orders, notice of intention to impose AML/CFT obligations on real estate sector; consideration of applying AML/CFT obligations to gatekeepers; advancement of legislation to improve procurement transparency.

### Recovery, inflation, and policy priority (summary assertions)
- Recovery:
  - "Just over two years after the COVID-19 shock, the unemployment rate and other measures of labor force underutilization have returned to end-2019 levels and output is close to its pre-pandemic trend."
  - "On net, 8.5 million jobs have been created since the end of 2020."
- Inflation and wages:
  - Rapid nominal wage and price increases; inflation broadened beyond durables to a larger consumption basket by late summer.
- Policy priority:
  - "Expeditiously slow wage and price growth without precipitating a recession."
  - Recommended: assertive withdrawal of monetary accommodation; raise policy rate above neutral in ex ante real terms and keep it there for some time.
  - June FOMC decision to raise rates by "75 basis points" and forward guidance peaking near "4 percent" assessed as "striking the right balance."
- Communications:
  - Telegraphed, conditional guidance on policy path recommended to ensure orderly withdrawal of accommodation.

### Sovereign Risk and Debt Sustainability Assessment — executive summary and key figures
- Baseline debt path (percent of GDP; selected years, public debt):
  - 2021: 127.8
  - 2022: 121.2
  - 2023: 120.5
  - 2024: 123.3
  - 2025: 125.7
  - 2026: 127.3
  - 2027: 129.0
  - 2028: 131.1
  - 2029: 132.7
  - 2030: 134.5
  - 2031: 136.2
- Change in public debt (percent of GDP; selected years):
  - 2021: -6.5
  - 2022: -6.6
  - 2023: -0.6
  - 2024: 2.8
  - 2025: 2.4
  - 2026: 1.6
  - 2027: 1.7
  - 2028: 2.1
  - 2029: 1.6
  - 2030: 1.8
  - 2031: 1.6
- Primary deficit (general government, percent of GDP):
  - 2021: 8.4
  - 2022: 2.7
  - 2023: 2.6
  - 2024: 2.9
  - 2025: 3.2
  - 2026: 2.9
  - 2027: 2.8
  - 2028: 3.1
  - 2029: 2.8
  - 2030: 3.0
  - 2031: 3.0
- Real GDP growth (percent):
  - 2021: 5.7
  - 2022: 3.0
  - 2023: 1.8
  - 2024: 0.8
  - 2025: 1.8
  - 2026: 2.1
  - 2027: 1.9
  - 2028: 1.7
  - 2029: 1.7
  - 2030: 1.7
  - 2031: 1.7
- Inflation (GDP deflator; percent):
  - 2021: 4.1
  - 2022: 6.7
  - 2023: 3.1
  - 2024: 2.0
  - 2025: 1.9
  - 2026: 1.9
  - 2027: 2.0
  - 2028: 2.0
  - 2029: 2.0
  - 2030: 2.0
  - 2031: 2.0
- Effective interest rate (percent):
  - 2021: 2.4
  - 2022: 1.9
  - 2023: 2.1
  - 2024: 2.7
  - 2025: 2.9
  - 2026: 3.0
  - 2027: 3.0
  - 2028: 2.9
  - 2029: 2.8
  - 2030: 2.7
  - 2031: 2.7
- Gross financing needs (percent of GDP):
  - 2021: 57.2
  - 2022: 36.5
  - 2023: 30.9
  - 2024: 28.9
  - 2025: 27.9
  - 2026: 27.0
  - 2027: 26.4
  - 2028: 26.5
  - 2029: 26.5
  - 2030: 26.0
  - 2031: 26.0
- Staff assessment:
  - "United States is at a low overall risk of sovereign stress and debt is sustainable."
  - Medium-term qualitative assessment: "moderate"; mechanical medium-term signal for fan chart indicates "high" risk largely driven by probability of debt non-stabilization.
- Adjustment scenario insight:
  - Gradually raising the primary general government surplus over the medium term to around "1 percent of GDP (1.1 percent of GDP for the federal government)" would put the debt-to-GDP ratio on a declining path.
  - Credible medium-term fiscal adjustment with reprioritization and revenue-gaining tax reform recommended.

### External position, current account, REER, and capital flows
- Current account and CA norm (2021, percent of GDP):
  - CA: -3.5
  - Cycl. Adj. CA: -3.1
  - EBA Norm: -1.2
  - EBA Gap: -1.9
  - COVID-19 Adj.: 0.8
  - Staff Gap: -1.1
- REER and valuation:
  - REER appreciated "1.6 percent in 2020 (pa)" and depreciated "3.8 percent in 2021 (pa)."
  - Staff assesses 2021 midpoint REER overvaluation to be "8.6 percent", with a range of "3.8-13.5 percent."
- Capital and financial accounts:
  - Financial account balance about "–3.1 percent of GDP in 2020" (compared with "–3.5 percent of GDP in 2020" noted elsewhere).
  - US has an open capital account; vulnerabilities limited by dollar reserve status.

### Data revisions, May data highlights, and forecast revisions
- Data revisions:
  - April consumption revised down by "0.8 percent" (durable goods down "1.5 percent").
  - Personal consumption expenditure contracted in May by "0.4 percent" relative to revised April.
  - Large "3.5 percent" reduction in demand for durables in May relative to April.
- Forecast revisions:
  - Revised down growth for 2022 from "2.2 to 1.0 percent Q4/Q4."
  - Annual average growth for 2022 revised from "2.9 to 2.3 percent."
  - Annual average growth for 2023 revised from "1.7 to 1.0 percent."
  - Core PCE inflation in 2022 modestly lowered from "4.6 to 4.4 percent Q4/Q4."
- May inflation readings:
  - Headline PCE inflation in May: "0.6 percent (6.3 percent year-on-year)."
  - Core PCE inflation in May: "0.3 percent (4.7 percent year-on-year)."
  - Median PCE inflation in May: "0.6 percent (4.8 percent year-on-year)."

### Administration statement highlights (macroeconomic assessment and policy priorities)
- Recovery and fiscal support:
  - "The U.S. economy grew by 5.7 percent in 2021."
  - ARP central to restoring growth; household balance sheets described as healthy.
- Growth expectations:
  - Administration expects growth "around 2 percent in 2022, and 1 percent for 2023."
  - "Firms added 2.4 million jobs in the first five months of 2022."
  - Unemployment holding just above "3.5 percent."
- Inflation and monetary policy:
  - Restoring price stability is a top priority; Fed characterized as "first and most important defense."
  - Recent policy actions: "75 basis point hike" on June 15 and initiation of rapid Fed balance sheet reduction.
- Fiscal priorities:
  - Prevent scarring, make growth more equitable and greener, modernize IRS, support international tax reform, shift incentives toward renewables, support higher labor force participation.
- Financial stability:
  - System remained resilient; limited direct exposure to Russia spillovers to date.
  - Fed established Standing Repurchase Agreement Facility and FIMA Repo facility.
- Climate and green transition:
  - Bipartisan Infrastructure Law investments and executive actions highlighted; Justice40 initiative aims to invest "40 percent" of key programs with "$29 billion thus far in 2021–22."

*Italicized source attribution: Content from 1usaea2022001 (United States), IMF staff report and Administration statement, July 2022.*

### 1. U.S. Sanctions on Russia and Belarus __________________________________________________________ 10

### 1. U.S. Sanctions on Russia and Belarus

### Overview and context
- Since February, the U.S. and over 30 other countries have imposed economic sanctions and export-controls on a large number of Russian and Belarussian individuals, companies, and financial institutions.
- The ongoing Russian invasion of Ukraine and the sanctions on Russia and Belarus are expected to:
  - reduce global growth in 2022,
  - increase commodity prices,
  - disrupt trade and financial linkages.
- The war and related sanctions will test the resilience of the financial system, including through:
  - direct and indirect exposures of banks and nonbanks,
  - market disruptions in commodity markets,
  - increases in counterparty risk,
  - the acceleration of cryptoization,
  - possible cyber-related events.

### Specific U.S. measures (Box 1)
- Asset freezes/financing restrictions for designated entities:
  - U.S. persons are prohibited from engaging in transactions with the Central Bank, the National Wealth Fund, and the Ministry of Finance of the Russian Federation.
  - Prohibition of transactions by U.S. persons in new debt with a maturity of greater than 14 days or new equity of certain Russian state-owned enterprises and entities that operate in the financial services sector of the Russian Federation.
- New additions to specially designated nationals (SDNs) and Blocked Persons list:
  - U.S. persons are prohibited from dealing with SDNs or assets belonging to SDNs.
  - Any assets belonging to SDNs within the U.S. or coming into the possession of a U.S. person must be blocked.
  - Targeted entities include major financial institutions, state owned entities in the bitcoin mining industry, companies in key Russian or Belarusian sectors, and key Russian or Belarusian government officials and individuals close to the government.
  - Entities owned directly or indirectly, 50 percent or more, by one or more blocked persons are also blocked.
- Import restrictions:
  - Imports to the U.S. of Russian petroleum, natural gas and coal products and certain other Russian-origin goods (seafood, alcoholic beverages, non-industrial diamonds) are prohibited.
- Export restrictions:
  - Restrictions on U.S. exports to Russia or Belarus apply to a wide range of goods, software and technology (with some limited license exceptions available).
  - Restrictions apply to re-exports to Russia or Belarus of U.S. items from third countries, exports to Russia and Belarus of foreign-made items containing more than de minimis levels of U.S. content, and exports to Russia or Belarus of certain foreign-made items that are the “direct product” of U.S. technology.
  - U.S. persons are prohibited from exporting, re-exporting, selling, or supplying, directly or indirectly, accounting, management consulting, or trust and corporate formation services.
  - Ban on the export, sale, supply (directly or indirectly) of U.S. dollar denominated banknotes to the Russian government or any person located in Russia.
- Investment restrictions:
  - New investments from the U.S. or by a U.S. person, wherever located, in any sector of the Russian economy are prohibited.
- Airspace and port closures:
  - All Russian air carriers, commercial operators and Russian-owned aircraft are banned from operating to, from, or within the U.S. territorial airspace (with some exceptions, e.g., for emergencies, certain diplomatic operations).
  - Russian-affiliated vessels are prohibited from entering U.S. ports.
- General Licenses:
  - The U.S. has issued General Licenses authorizing U.S. persons to engage in certain activities that would otherwise be prohibited (such as the export or re-export of agricultural commodities, medicine, or medical devices).
- Some measures constitute capital flow management measures introduced for reasons of national or international security.

### Macro-financial and domestic implications noted in the report
- Public health and macro backdrop (selected facts affecting vulnerability to sanctions and shocks):
  - 71 percent of the eligible population have been fully vaccinated and around one half have received a booster shot.
  - The U.S. has now passed a tragic landmark of 1 million dead from COVID-19 and daily deaths remain in the hundreds.
  - Within 24 months of the COVID-19 shock, the unemployment rate and other measures of labor force underutilization have returned to end-2019 levels and output is close to its pre-pandemic trend.
  - Median PCE inflation continues to rise; rapid increases in shelter, healthcare and other services inflation; rapidly rising food and energy prices—fueled by the Russian invasion of Ukraine—have further added to headline inflation.
  - The overall general government deficit rose by close to 9 percent of GDP during the pandemic.
  - The US$1.9 trillion American Rescue Plan—passed in March 2021—slowed the pace of fiscal contraction in 2021-22 but did not forestall it.
  - The real exchange rate is now around 5 percent more appreciated than in 2021.
- Expected external effects of the sanctions and war:
  - Reduce global growth in 2022.
  - Increase commodity prices.
  - Disrupt trade and financial linkages.
  - Test financial system resilience through multiple channels (commodity markets, counterparty risk, cryptoization, cyber risk).

### Financial stability vulnerabilities relevant to sanctions and spillovers
- Rapid tightening in financial conditions amid uncertainty from the Russian invasion of Ukraine.
- Corporate sector:
  - Corporate leverage remains close to the high levels seen prior to the pandemic, with sizable and increasing corporate cash buffers and a lengthening in the duration of corporate debt.
  - Heterogeneity across sectors and firms could reveal pockets of corporate stress if financial conditions tighten more than expected.
- Market and institutional fragilities:
  - Fixed income markets have proven insufficiently resilient under stress at various conjunctures over the last few years.
  - Ongoing risk that smooth functioning of key money, repo, and Treasury markets is overly reliant on the unprecedented level of liquidity in the system.
  - Prime and tax-exempt money market funds (as well as dollar-denominated offshore funds) remain subject to runs; some bond funds maintain significant holdings of illiquid assets.
- Nonbank entities and markets:
  - Leverage among hedge funds and life insurance companies is high; life insurers have decreased holdings of liquid assets and are more reliant on short term funding.
  - Issuance of securitized instruments—particularly those linked to auto loans—has risen.
- Digital assets:
  - Rapid growth of the digital assets sector and recent selling pressures highlight fragility and opacity.
  - Several prominent stablecoins are marketed as being convertible to U.S. dollars though backed by assets that are illiquid or may lose value during market stress, making par value claims vulnerable to run risk.
  - Some stablecoin providers have recently seen large redemptions which have prevented them from maintaining their peg to the U.S. dollar.
  - Other crypto-assets have experienced significant price volatility, creating uncertain ripple effects through the financial system (not, at this stage, viewed as systemic).
- Housing:
  - Nationwide, average prices are 38 percent above where they were at end-2019 and prices are relatively high as a share of both rents and household income.
  - Leverage has been contained by relatively low loan-to-value ratios and conservative underwriting standards; refinancing activity has reduced average mortgage payments to all-time lows as a share of disposable income.
  - Financial stability risks from housing appear contained, but housing affordability has worsened, especially for lower income households.

### Policy gaps, recommendations, and authorities’ actions
- FSAP recommendations that remain unaddressed include:
  - Ensuring each Financial Stability Oversight Council member has an explicit financial stability objective in their mandate.
  - Closing a range of data gaps.
  - Finalizing arrangements for market-wide circuit breakers and providing greater budgetary autonomy for the SEC and CFTC.
  - Reviewing prudential requirements for non-internationally active banks (category III and IV) to ensure consistency with the Basel framework.
  - Strengthening the consistency of risk management practices by central counterparties.
  - Subjecting mutual funds to SEC-led liquidity stress tests.
  - Developing a consolidated group capital requirement for insurance companies.
  - Scope to deploy a range of macroprudential tools to improve financial system resilience.
- Authorities’ views and actions:
  - Large fluctuations in asset prices and tightening of financial conditions have occurred alongside increased economic uncertainty from the Russian invasion of Ukraine.
  - Measures of market liquidity have worsened during this period, but markets have generally functioned well and key funding markets have been resilient.
  - Households and businesses have decreased borrowing as a share of GDP and interest coverage ratios have improved.
  - Banks have maintained capital ratios well above regulatory minima and are very liquid, with less reliance on wholesale funding.
  - Substantial work is underway to strengthen data collection on hedge fund activities, uncleared bilateral repos, and liquidity and redemption features of open-end funds, and to improve the resilience of money market funds.

*International Monetary Fund — Chapter: U.S. Sanctions on Russia and Belarus (from the United States country report).*

### 13.      The strong underlying momentum in the U.S.

### 13.      The strong underlying momentum in the U.S.

### Outlook and near-term dynamics
- Growth is expected to fall to 0.7 percent q4/q4 by end-2023 and then pick up gradually into 2024.
- The U.S. is expected to narrowly avoid a recession, but the risk of the economy “stalling” and tipping into a short-lived downturn are significant.
- Consumption will remain the driver of growth in the near-term as household savings are drawn down and the effects of the pandemic dissipate.
  - The overhang of household savings accumulated during the pandemic is estimated to be equivalent to around 14 percent of annual consumption.
- Binding capacity constraints and the ongoing reshaping of the U.S. economy are expected to support continued capital formation, particularly in intellectual property.
- PCE inflation is expected to fall steadily as activity decelerates and supply-demand imbalances are resolved, reaching 2 percent on a year-on-year basis by end-2023.

### Downside risks and financial conditions
- The main downside risk is an abrupt tightening in financial conditions.
  - The most likely trigger would be continued upside surprises to inflation (e.g., escalation of the Ukraine war, China shutdowns, a shift in inflation expectations, acceleration in nominal wage demands, or greater-than-expected inertia in realized inflation).
  - If inflation surprises to the upside, market views on the likely path for the federal funds rate could shift to a path well above that signaled by the FOMC in its June meeting, affecting asset valuations and imposing a larger drag on U.S. activity with important global spillovers.
- A resurgence of COVID-19 at home or abroad is an additional salient downside risk.
- If the economy is hit by a negative shock, the predicted slowdown could turn into a short-lived recession.

### Box 2 — The U.S. oil sector’s reaction to the global price shock (summary)
- Hydraulic fracturing production can be ramped up faster than elsewhere.
- Typical investment response: a 10 percent increase in oil and gas prices adds around 2.5 percent to U.S. oil and gas investment in the first year and a cumulative 5 percent after two years.
- Lead time from investment to production is roughly 6 months for shale oil and gas.
- Industry expectations and constraints:
  - Industry contacts expect capital spending to grow around 5–10 percent in 2022 and 2023 (an increase that has been largely unchanged after the Russian invasion of Ukraine).
  - Public companies are typically re-investing only 30–50 percent of their free cash flow into new projects.
  - Shortages of labor and equipment (e.g., steel pipes) have exacerbated cost inflation and delayed some projects.
  - Constraints on capital availability due to Environmental, Social, and Governance standards may play a role.
- Natural gas export constraints:
  - LNG terminal projects require long-term take-or-pay commitments; European buyers are reluctant to make such commitments.
  - Even with contracts and expedited approval and construction, it would take 2 or more years for a new terminal to come online.
  - Insufficient gas pipeline capacity may be a further binding constraint over the short term (especially in the Appalachian Basin).
  - Despite challenges, LNG export capacity is expected to grow by 18 percent this year and could possibly double by 2030 (based on already-approved terminal projects).

### Wage and price pressures
- The principal near-term challenge is reducing wage and price inflation without precipitating a recession.
- Wage developments:
  - Nominal wages accelerated rapidly in late-2021 as demand for workers outpaced labor supply, producing wage increases faster than since the early-1980s.
  - Part of the slow labor supply recovery reflects a demographic trend (rising share of older workers who participate less).
  - The most rapid wage increases have been incident on lower income workers:
    - The nominal wages of the lowest two deciles are now 12 percent above pre-pandemic levels.
    - The wage for the median worker is 10 percent higher than pre-pandemic.
  - Reduction in wage polarization has also been seen in a significant decline in the share of households earning less than half the median wage; sustainability of this reduction is unclear.
- Labor market dynamism:
  - Job-to-job transitions now exceed pre-pandemic levels.
  - Vacancies to unemployment ratio is at the highest level since 2000.
  - High quits, openings, and hiring—most visible in leisure and hospitality—have strengthened worker bargaining power and put upward pressure on wages.
- Inflation dynamics:
  - The acceleration in nominal wages accompanied a broadening of price pressures; median PCE inflation overlapped with the rise in median wages at the end of 2021.
  - Regional and sectoral data suggest the two-way feedback between wages and prices has been relatively weak and likely to unfold over a longer horizon.

### Monetary policy stance and transmission
- Rapid withdrawal of monetary accommodation is required to contend with broad-based wage and price inflation.
  - Model simulations indicate quickly bringing inflation back to 2 percent requires an increase in the ex-ante real policy rate to above neutral.
  - Staff’s baseline forecast is predicated on the median projection for the federal funds rate published at the June FOMC meeting; that rate path would push the ex ante real policy rate above zero by late-2022 and is expected to bring inflation back to 2 percent by late 2023/early 2024.
  - If there is more inertia in wage and price inflation than envisaged, a tighter policy stance will be needed, potentially causing a more pronounced increase in unemployment and a short recession.
- Federal Reserve balance sheet:
  - The Fed’s balance sheet should be quickly pared back as communicated in the May FOMC meeting.
  - Empirical evidence suggests balance sheet run-off is likely to have a relatively small impact on monetary conditions; changes in the federal funds rate must remain the primary tool.
- Communication:
  - Effective communication of policy intentions is important to keep medium-term inflation expectations anchored.
  - Recommendation: The Federal Reserve could publish, at each policy meeting, an internally-consistent economic projection and rate path produced by Fed staff (and potentially endorsed or recognized by the FOMC), supplemented with a few alternate, quantified scenarios to show the range of views and distribution of risks—preferable to relying on the quarterly Summary of Economic Projections alone.
  - The Fed could clarify in its Statement on Longer-Run Goals and Monetary Policy Strategy how the policy framework applies when inflation is well above two percent.

### Financial stability and market plumbing vulnerabilities
- Bringing down inflation and withdrawing fiscal stimulus will tighten financial conditions and restrain demand; clear communication can reduce the chance of abrupt or disruptive shifts.
- Monetary policy transmission complexities include channels through nonbanks.
- Material chance exists that the needed shift in policy will trigger a contraction in activity and a sizable increase in unemployment, with negative global spillovers through reduced U.S. demand and tighter global financial conditions affecting dollar-leveraged entities.
- Market plumbing vulnerabilities and suggested mitigants:
  - Known shortcomings exist in Treasury and money market plumbing; some asset management vehicles pose run risks.
  - Suggested measures to increase market resilience include:
    - Introduction of standing facilities for primary dealers and foreign and international monetary authorities (already underway).
    - Consider central clearing for the Treasury market.
    - Modify the supplementary leverage ratio to allow increased dealer intermediation capacity.
    - Move all money market funds to a floating net asset value.
    - Consider more binding (and possibly countercyclical) liquid asset requirements.
    - Subject asset management vehicles to an annual liquidity stress test.
    - Institute pre-determined arrangements to lock-in a proportion of an investor’s shares in the event of unusual outflows.
    - Provide for in-kind redemptions to meet withdrawals by institutional investors.
    - Allow for swing pricing or temporary gates on outflows.

### Authorities’ views (summaries from text)
- Authorities: The recovery was remarkably fast with a quick return to full employment, but inflation has surprised on the upside and is expected to remain high in the near future.
- Policymakers expect that dissipation of supply chain constraints, a steady increase in labor force participation, and a slowdown in demand (as financial conditions tighten and monetary and fiscal support are withdrawn) should facilitate a steady reduction in price pressures while maintaining a strong labor market during disinflation.
- The FOMC has increased its policy rate at meetings since March and clearly indicated expectations of ongoing increases in the target range; the Fed is data dependent and intends to expedite return of the policy rate to neutral or modestly restrictive settings and then assess effects later in the year.
- The plan to reduce the Fed’s balance sheet is underway; the Fed considers its existing communication tools to be well understood and effective.

*UNITED STATES — INTERNATIONAL MONETARY FUND*

### Box 4. Monetary Policy Paths to Return Inflation to Target

### Box 4. Monetary Policy Paths to Return Inflation to Target

### Overview
- To expeditiously return PCE inflation to target, the federal funds rate would need to rise above its neutral level (calibrated here as 0.5 percent in real ex ante terms) and remain above neutral for at least one year.
- Three different policy paths were simulated in the Fed’s semi-structural FRBUS model: Average inflation targeting, Optimal control, and Stickier expectations formation.

### Average inflation targeting
- Rule: rate path is a function of the deviation of the three-year trailing average of inflation from 2 percent and the deviation of output from potential; backward-looking averaging implies a more gradualist approach.
- Simulated outcomes:
  - Increase in the federal funds rate by around 100bp each year in 2022–24.
  - Relatively slow decline of inflation, reaching two percent in 2026.
  - Ex ante real rates would remain below neutral until 2024.
- Note: The average inflation targeting rule in this box is an IMF staff assumption and does not represent the Federal Reserve’s current policy framework.

### Optimal control
- Objective: maximizes intertemporal welfare (squared deviations of unemployment from NAIRU and squared deviations of inflation from the 2 percent target), with policymaker smoothing of policy-rate adjustments to prevent disruptive jumps.
- Simulated outcomes:
  - Increases policy rates around 300bp by end-2023 and a further ½ percent in 2024.
  - Ex ante real rates rise above the neutral level in 2023 H1.
  - Brings inflation back to target in 2024.
  - Lowers growth to 1.5 percent in 2025.
  - Causes unemployment to rise marginally above 4 percent.

### Stickier expectations formation
- Assumption: near-term inflation expectations have become entrenched at higher levels (agents expect above-target inflation will persist for longer).
- Simulated outcomes:
  - A more front-loaded path for the federal funds rate is needed, peaking at close to 4 percent.
  - Returns inflation to target but over a longer timeframe.
  - Unemployment rises above 4 percent in early 2024, remaining at 4–4¼ percent over the medium term.
  - Implies a higher sacrifice ratio to disinflate.

### Key caveats and sensitivities
- Policymaker smoothing of rate adjustments is assumed in the optimal control path to prevent disruptive jumps.
- The pace of disinflation and the optimal rate path depend critically on assumed model parameters and, particularly, assumptions about expectations formation. 

*Source: Box 4, UNITED STATES, INTERNATIONAL MONETARY FUND.*

### 34.      A strategy for deficit reduction will be needed to increase the general government

### 1usaea2022001 - 34.      A strategy for deficit reduction will be needed to increase the general government

### Fiscal strategy and deficit reduction
- A 1 percent of GDP general government primary surplus would be sufficient to put the public debt-GDP ratio on a downward path by the end of this decade (although the debt-GDP ratio would remain well above pre-pandemic levels for decades to come).
- Policy options to achieve a medium-term general government primary surplus include:
  - Scaling back poorly targeted tax expenditures (examples listed: exemptions for employer-provided health care, for individuals selling their principal residence, for mortgage interest, and for state and local taxes).
  - Phasing in a federal consumption tax and/or a carbon tax (alongside well-designed assistance to protect the poor).
  - Reducing imbalances in the social security system.
  - Containing health care costs.

### Trade policy and openness
- Open trade policies, at home and abroad, remain vital to boosting economic performance and easing supply constraints.
- First-step recommendation: roll back tariffs and other trade distortions introduced over the past 5 years (including the tariffs on steel, aluminum, and a range of products imported from China). Expected benefits: support growth and help reduce inflation.
- Complementary domestic policies to bolster a “worker-centered” trade policy:
  - Worker training.
  - Apprenticeship programs.
  - Infrastructure development to increase productivity of U.S. firms and workers for global competition.
- Multilateral engagement recommendations:
  - Actively engage with all major trading partners to address core issues that risk fragmenting the global trade and investment system (tariffs, farm and industrial subsidies, services trade).
  - Strengthen U.S. engagement at the WTO—including by supporting a functioning dispute settlement system—to foster cooperation and promote trade policy certainty.
- Authorities’ stated positions include:
  - Emphasis on a worker-centered trade policy to build a more equitable and inclusive economy while protecting American workers.
  - Indo-Pacific Economic Framework for Prosperity launched with 13 countries to fuel economic activity, investment, and promote sustainable and inclusive growth benefiting workers, consumers, and businesses.
  - Efforts to make the WTO’s negotiating arm more effective, promote transparency, and improve compliance and enforcement of WTO commitments.
  - Address non-market policies and practices such as subsidies and excess capacity, working with partners (including the EU and Japan through the Trilateral partnership).
  - Clarification of WTO rules as they apply to border carbon adjustments would be helpful in avoiding future tensions.
  - Tariffs viewed as a valid tool against unfair competition; a mandatory four-year review of Section 301 tariffs on China has begun; Section 232 national security tariffs on steel and aluminum have been maintained.
  - Arrangements with the European Union, Japan, and the United Kingdom to jointly address non-market excess capacity and preserve U.S. steel and aluminum industries.

### Supply chain resilience
- Need to increase resilience of U.S. supply chains; administration actions include:
  - Establishment of an interagency Supply Chain Disruptions Task Force to improve functioning of supply chains, address bottlenecks, and promote economic and national security.
  - Consideration of legislation to support domestic investment in specific products and technologies.
- Best practices recommended for resilience:
  - Greater diversification of input sourcing across countries.
  - Improving infrastructure, logistics and information systems.
  - Reducing trade costs.
- Caution: pursuit of supply chain resilience should not be used to favor domestic over foreign producers or create incentives that fragment the global trading system.
- Authorities’ measures and priorities:
  - Presidential task force across multiple agencies to identify sources of disruptions and develop policy responses.
  - Emphasis on economic and national security and a diverse ecosystem of suppliers.
  - Sector-by-sector policies incentivizing greater reliance on strategic allies and, in some cases, stockpiling certain commodities and products.
  - Current priorities: semiconductors, large capacity batteries, critical mineral and materials, and pharmaceuticals.
  - Policy tools include federal support for domestic manufacturing, deploying the Defense Production Act, increasing public investments in R&D, building strategic stockpiles, and focusing federal procurement on domestically made products.
  - Efforts with allies to strengthen collective supply chain resilience and improve information on supply chain structures.

### Transitioning to a low carbon model
- Recent policy steps:
  - Infrastructure Investment and Jobs Act provisions: expand public transit, build electric vehicle chargers, weatherize homes, increase resilience of roads, bridges, and the power grid.
  - Raising fuel economy standards for passenger vehicles and instituting an action plan to reduce methane emissions.
- Assessment:
  - Authorities’ ambitious climate goals cannot be achieved without more determined action; setback in passing the Build Back Better Act endangers achievement of administration’s emission reduction goals.
  - Regulatory and executive actions alone are unlikely to be sufficient to incentivize the needed transition.
- Recommended policy mix:
  - Combine broad-based carbon pricing, sectoral feebates, regulatory actions, and elimination of subsidies for fossil fuel and carbon-intensive agriculture.
  - If the share of electricity generation from renewables can be significantly increased (including through a national clean energy standard), policies to incentivize rapid switch to electric vehicles (e.g., expanding federal tax credits, switching the federal fleet to electric vehicles, accelerating national charging infrastructure) should be implemented.
  - Incentivize energy efficiency improvements in existing and new buildings (including retrofitting federally owned buildings).
  - Reduce greenhouse gas emissions from agriculture.
- Transition challenges and labor considerations:
  - Transition will involve significant reallocation of factors of production across sectors and skills.
  - Redeployment of workers will need to overcome a sizable skills mismatch, particularly for older workers.
  - The country’s very flexible labor markets are an advantage, but training and financial support for the most affected workers would facilitate faster reallocation with lower societal costs.
  - Policies should be put in place well ahead of time to ensure decarbonization garners broad societal support and does not leave behind communities reliant on fossil fuels for jobs, activity, and local tax revenue.
- Energy price and national security drivers:
  - Recent spike in global energy prices and concerns about reliability and security of energy supply create incentives to accelerate transition to a carbon-neutral economy.
  - National security concerns strengthen the case to reduce fossil fuel reliance and prioritize renewables.
  - Subnational decisions to lower taxation of gasoline and other products are judged to go in the wrong direction; targeted support to vulnerable households is preferred.
- Trade-offs with fossil fuel exports:
  - Administration’s climate objectives should focus on reducing carbon intensity of domestic consumption.
  - Private sector-led expansion in U.S. export capacity (e.g., acceleration in construction of LNG terminals and pipelines) would have positive outward spillovers to trading partners as they decarbonize.
  - Critical caveat: expansion of domestic oil and gas production must be coupled with strict regulations to ensure clean development (examples: high penalties for methane leaks or flaring).
- Authorities’ investments and priorities:
  - Infrastructure, Investment and Jobs Act resources for nationwide EV charging network, building energy efficiency, zero emission transit, upgrading power grid and transmission, R&D for carbon storage and clean hydrogen.
  - Investments projected to crowd in significant private sector funding.
  - Fuel economy standards for passenger vehicles made more stringent; efforts to reduce methane emissions from pipelines, cattle, orphaned oil and gas wells.
  - Build Back Better plan climate policies remain under active consideration.
  - Centerpiece: ensure transition provides tangible benefits to disadvantaged communities (Justice40 Initiative), including place-based policies to diversify fossil fuel-dependent regional and local economies.

### Labor market and job transition evidence (Box 8)
- Geographic and occupational patterns:
  - Green and pollution-intensive jobs tend to be located geographically close together.
  - U.S. geographic labor mobility has declined, which could impede the green transition; however, data shows areas with a significant share of green-intensive employment tend to be adjacent to areas with a high number of pollution-intensive jobs: 72 percent of commuting zones that are rich in pollution intensive jobs are either also rich in green jobs or border a commuting zone that is.
  - Suggestion: geographic mobility alone may not be the primary friction preventing transitions from pollution-intensive to green jobs.
- Differences between green and polluting jobs:
  - Green jobs tend to be more skilled, more urban, and relatively less vulnerable to automation.
  - Workers in green jobs command a wage premium (even after controlling for skill levels, age, gender, and geography).
  - Transition probabilities:
    - Probability of transitioning into a green job is around 15 percent for workers in polluting jobs.
    - Probability of transitioning into a green job is around 45 percent for workers already employed in a green job.
    - Workers in neutral jobs also face a low rate of transition into green jobs.
- Historical evidence on regulatory transitions:
  - In commuting zones where Clean Air Act regulations become more binding, there is a significant employment shift out of the polluting industry, but overall employment in that commuting zone does not appear to be affected by the regulation.
  - This suggests workers can reallocate within the same commuting zone without needing to relocate, though data cannot determine if new jobs have similar wages, benefits, and job security.

### Governance, anti-corruption, and transparency
- Strengths and shortcomings:
  - The U.S. is substantially effective at investigating and prosecuting money laundering and cooperating with other jurisdictions over corruption proceeds located in the U.S.
  - U.S. has been confiscating assets related to foreign corruption located in the U.S. and has returned part of those assets to affected countries.
  - Serious shortcomings remain: entity transparency and the content and coverage of preventive measures (including in relation to identifying politically exposed persons) make it easier for foreign corrupt officials to hide proceeds in the U.S.
  - Gatekeepers (lawyers, accountants, trust and company service providers) are not yet fully subject to customer due diligence and suspicious transaction reporting obligations.
  - Money laundering risks in high-end real estate need addressing: real estate agents are not subject to comprehensive AML/CFT requirements and non-bank mortgage lenders and originators have limited awareness of AML/CFT obligations (especially regarding politically exposed persons).
- Ongoing and planned initiatives:
  - Strategy on countering corruption includes measures to address shortcomings.
  - Corporate Transparency Act (CTA) enacted; when fully operational the U.S. will have a government-maintained national registry of beneficial owners for certain U.S. companies.
    - Implementation is expected to be incremental.
    - Proposed rules: companies created or registered after requirements become effective would have 14 days after formation to file beneficial ownership information; companies formed before effective date will have a year to file initial reports.
    - Beneficial ownership information will be available to FinCEN and shareable with relevant federal and state agencies and competent authorities from other countries, and, with company consent, financial institutions.
    - FinCEN will need to revise its customer due diligence rule and develop infrastructure to administer CTA requirements.
  - Treasury actions:
    - Continued use of Geographic Targeting Orders to collect certain information for high-end real estate purchases.
    - Issued a notice of intention to impose AML/CFT obligations on the real estate sector.
  - Consideration of applying AML/CFT obligations to gatekeepers.
  - Advancement of legislation to improve transparency in government procurement as a means to combat corruption.

*Source: IMF staff report excerpt.*

### 47.      The U.S. economy has staged a strong recovery from the COVID-19 shock. The positive

### 47.      The U.S. economy has staged a strong recovery from the COVID-19 shock. The positive

### Recovery and labor market outcomes
- Just over two years after the COVID-19 shock, the unemployment rate and other measures of labor force underutilization have returned to end-2019 levels and output is close to its pre-pandemic trend.
- Rapid wage increases for lower income workers have reduced income polarization and poverty fell in 2020.
- On net, 8.5 million jobs have been created since the end of 2020.
- The swift policy response maintained the smooth functioning of U.S. financial markets and prevented a surge of bankruptcies.

### Inflation and wage dynamics
- The rapid rebound has been accompanied by a sharp increase in nominal wages and prices.
- Inflation was initially concentrated in a subset of durable goods where strong demand collided with binding supply constraints; by the end of the summer, price pressures became broad based across a significant slice of the consumption basket.
- Labor shortages were initially apparent in low skill occupations, driving up wages for that segment; by the fourth quarter, wage pressures were quickly spreading across the economy as firms struggled to fill vacancies and workers switched jobs more frequently.

### Policy priority: disinflation without recession
- The policy priority is to expeditiously slow wage and price growth without precipitating a recession.
- Key uncertainties: persistent global supply constraints, domestic labor shortages, and additional uncertainty created by the Russian invasion of Ukraine.
- Although fiscal support is being withdrawn, the size and timing of the effects of past stimulus—which is expected to continue feeding into activity and inflation through a drawdown of household savings—are highly uncertain.

### Monetary policy: recommended stance and actions
- Returning to price stability will require an assertive withdrawal of monetary accommodation.
- The Federal Reserve has signaled intent to pursue a much tighter policy stance; to decisively bring inflation back to the Federal Reserve’s 2 percent goal by late 2023/early 2024 will require:
  - raising the policy rate above neutral, in ex ante real terms, and
  - keeping it there for some time.
- The FOMC’s decision at its June meeting—to raise rates by 75 basis points and provide forward guidance around a path for the federal funds rate that peaks at close to 4 percent—strikes the right balance.
- This policy path should create the up-front tightening of financial conditions necessary to quickly bring inflation back to target.

### Communications and rates guidance
- The FOMC should telegraph, well in advance, clear guidance on the path for the policy rate to ensure the withdrawal of accommodation is orderly, methodical, and transparent.
- Communications should emphasize that policy guidance is conditional and will depend critically on future developments.
- Changes to strengthen the Federal Reserve’s communication tools would carry a high payoff in the current conjuncture.

### Risks of policy miscalibration
- Misjudging the policy mix has high stakes and sizable costs domestically and via global spillovers.
- Overly forceful policy response risks triggering abrupt tightening of financial conditions and a U.S. recession, creating negative global spillovers.
- An insufficient policy shift risks creating a prolonged period of high inflation necessitating even stronger—and more economically costly—measures later.
- Baseline forecast: the U.S. is expected to slow but narrowly avoid a recession; material risks remain that a negative shock could turn the slowdown into a short-lived recession.

### Supply-side reforms and fiscal policy
- The inability to pass much of the administration’s reform agenda is a missed opportunity to energize supply-side performance.
- The economy needs lasting changes to:
  - release supply-side constraints,
  - raise productivity,
  - support labor force participation, and
  - incentivize investment and innovation.
- Slowing growth and rising inflation strengthen the case for a better social safety net.
- Policymakers should continue to press for changes to tax, spending, and other areas (including immigration policy) to boost aggregate supply, adapting proposals pragmatically to garner political support.

### External position, trade, and exchange rates
- The 2021 external position remains moderately weaker than the level implied by medium-term fundamentals and desirable policies.
- The current account deficit is well below its medium-term norm and recent real exchange rate appreciation may have furthered the degree of overvaluation.
- Recommended actions:
  - roll back trade restrictions and tariffs introduced over the past 5 years,
  - work with trading partners to strengthen the rules-based multilateral trading system, and
  - incorporate best practices to build supply resilience (greater diversification in input sourcing across countries, improved infrastructure and access to information, and reduced trade costs).

### Climate transition and structural adjustment
- More determined action is needed to achieve administration climate goals and facilitate a smooth, speedy transition to a low carbon economy.
- In the absence of legislative approval of the climate provisions in the Build Back Better plan, reliance on regulatory and executive actions appears insufficient to incentivize the transition.
- Recommended instruments to shift market incentives:
  - broad-based pricing of carbon and other pollutants,
  - sectoral feebates,
  - regulatory restraints on emissions,
  - elimination of subsidies for fossil fuels and carbon-intensive agriculture, and
  - reprioritization of public spending toward mitigation and adaptation.
- To secure societal support and manage distributional costs, the transition should embed policies that:
  - lessen rigidities in reallocating factors of production across sectors and regions,
  - ensure availability of appropriate human capital for a low carbon economy, and
  - meaningfully support those who bear a disproportionate share of adjustment costs.

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

*Source: IMF staff report — United States Article IV consultation (selected sections).*

### Appendix II. Sovereign Risk and Debt Sustainability Assessment

### Appendix II. Sovereign Risk and Debt Sustainability Assessment

### Executive summary and baseline
- After the unprecedented fiscal response to COVID-19, the U.S. budget deficit contracted in 2021 and is expected to return to pre-pandemic levels, in percent of GDP, by 2022.
- Under the staff baseline (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 FY2021 to around 113 percent of GDP by 2031.
  - General government gross debt is projected to rise from about 128 percent of GDP to 135 percent of GDP by 2031.
- Public debt is projected to rise over the medium term as aging-related expenditures on health and social security feed into the debt dynamics.
- Gross financing needs (GFN) are large but manageable given the global reserve currency status of the U.S. dollar.

### Key figures and projections (selected, percent of GDP unless indicated)
- Public debt (selected years): 2021: 127.8; 2022: 121.2; 2023: 120.5; 2024: 123.3; 2025: 125.7; 2026: 127.3; 2027: 129.0; 2028: 131.1; 2029: 132.7; 2030: 134.5; 2031: 136.2.
- Change in public debt (percent of GDP): 2021: -6.5; 2022: -6.6; 2023: -0.6; 2024: 2.8; 2025: 2.4; 2026: 1.6; 2027: 1.7; 2028: 2.1; 2029: 1.6; 2030: 1.8; 2031: 1.6.
- Primary deficit (general government, percent of GDP): 2021: 8.4; 2022: 2.7; 2023: 2.6; 2024: 2.9; 2025: 3.2; 2026: 2.9; 2027: 2.8; 2028: 3.1; 2029: 2.8; 2030: 3.0; 2031: 3.0.
- Noninterest revenues (percent of GDP): 2021: 31.0; 2022: 32.6; 2023: 31.7; 2024: 31.1; 2025: 30.9; 2026: 31.3; 2027: 31.5; 2028: 31.5; 2029: 31.6; 2030: 31.7; 2031: 31.8.
- Noninterest expenditures (percent of GDP): 2021: 39.4; 2022: 35.3; 2023: 34.4; 2024: 34.0; 2025: 34.1; 2026: 34.2; 2027: 34.3; 2028: 34.6; 2029: 34.3; 2030: 34.7; 2031: 34.7.
- Automatic debt dynamics / interest rate–growth differential (percent of GDP): 2021: -9.3; 2022: -9.3; 2023: -3.3; 2024: -0.1; 2025: -0.9; 2026: -1.3; 2027: -1.1; 2028: -1.0; 2029: -1.2; 2030: -1.2; 2031: -1.4.
- Real GDP growth (percent): 2021: 5.7; 2022: 3.0; 2023: 1.8; 2024: 0.8; 2025: 1.8; 2026: 2.1; 2027: 1.9; 2028: 1.7; 2029: 1.7; 2030: 1.7; 2031: 1.7.
- Inflation (GDP deflator; percent): 2021: 4.1; 2022: 6.7; 2023: 3.1; 2024: 2.0; 2025: 1.9; 2026: 1.9; 2027: 2.0; 2028: 2.0; 2029: 2.0; 2030: 2.0; 2031: 2.0.
- Nominal GDP growth (percent): 2021: 10.1; 2022: 9.9; 2023: 4.9; 2024: 2.8; 2025: 3.7; 2026: 4.0; 2027: 3.9; 2028: 3.7; 2029: 3.7; 2030: 3.7; 2031: 3.7.
- Effective interest rate (percent): 2021: 2.4; 2022: 1.9; 2023: 2.1; 2024: 2.7; 2025: 2.9; 2026: 3.0; 2027: 3.0; 2028: 2.9; 2029: 2.8; 2030: 2.7; 2031: 2.7.
- Gross financing needs (percent of GDP): 2021: 57.2; 2022: 36.5; 2023: 30.9; 2024: 28.9; 2025: 27.9; 2026: 27.0; 2027: 26.4; 2028: 26.5; 2029: 26.5; 2030: 26.0; 2031: 26.0.
- Of which: debt service (percent of GDP): 2021: 49.2; 2022: 34.2; 2023: 28.6; 2024: 26.4; 2025: 25.1; 2026: 24.6; 2027: 24.0; 2028: 23.8; 2029: 23.7; 2030: 23.9; 2031: 23.5.
- Projection note: Local currency debt comprises the debt servicing figures; foreign currency figures are 0.0 across projected years.

### Adjustment scenario and policy recommendations
- Adjustment scenario insight:
  - General government primary deficit was 8.4 percent of GDP in 2021 and is projected at 2.8 percent of GDP in 2022 (text) / table shows 2.7 percent in 2022.
  - Gradually raising the primary general government surplus over the medium term to around 1 percent of GDP (1.1 percent of GDP for the federal government) would put the debt-to-GDP ratio on a declining path.
  - The target primary surplus would need to be larger to bring the debt ratio closer to pre-Great Recession levels.
- Policy recommendations:
  - 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.
  - Over the medium term, suggested fiscal consolidation aimed at a medium-term general government structural primary deficit of about 1 percent of GDP should broadly stabilize the debt-to-GDP ratio and help address the current account gap (from Appendix III).
  - Structural policies to increase competitiveness: upgrading infrastructure; enhancing schooling, training, and mobility of workers; supporting the working poor; implementing policies to increase growth in the labor force (including skill-based immigration reform).
  - Roll back tariff barriers and resolve trade and investment disagreements in a manner that supports an open, stable, and transparent global trading system.

### Debt servicing, interest–growth dynamics, and realism
- Debt servicing costs benefit from a favorable interest rate–growth differential reflecting accommodative monetary policy and the safe-haven status of the United States.
- Under staff’s baseline, the effective nominal interest rate is projected to rise gradually from the projected level of 1.9 percent in 2022 to 2.7 percent by 2031 (close to the 2010–18 average level).
- As a result, real interest rates will continue to act as a debt-reducing flow over the medium term (automatic debt dynamics shown negative in projections).
- Realism assessment:
  - Baseline economic assumptions are generally within the error band observed for all countries.
  - The 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.
- Mitigating factors:
  - The depth and liquidity of the U.S. Treasury market, the safe-haven status of the U.S. dollar, the strength of institutions, the depth of the investor pool, and the Fed’s stabilizing role mitigate risks associated with high external and gross financing requirements.

### Risk assessment and stress analysis
- Staff assessment: United States is at a low overall risk of sovereign stress and debt is sustainable.
- Medium-term risk: staff’s qualitative assessment is "moderate" on the medium-term horizon, aligned with the mechanical signal; the mechanical medium-term signal for the fan chart indicates a "high" risk largely driven by the probability of debt non-stabilization.
- Long-term risks: moderate as aging-related expenditures on health and social security feed into debt dynamics; reforms to address population aging risks on social security are recommended.
- Debt Fanchart and GFN financeability results (selected indicators):
  - Fanchart width: 46.9
  - Probability of debt not stabilizing (pct): 99.7 and 0.8 (two entries in the table)
  - Terminal debt level x institutions index: 33.0 and 0.7
  - Debt fanchart index: 2.2
  - Average GFN in baseline: 29.6 and 10.1
  - Bank claims on government (pct bank assets): 11.5 and 3.7
  - Change in claims on govt. in stress (pct bank assets): 2.1 and 0.7
  - GFN financeability index: 14.5
- Module outcomes:
  - Debt Fanchart Module: pointing to a high level of risk.
  - GFN Financeability Module: suggests lower, but still moderate, level of risk.
  - Medium-term index (MTI) classification: moderate overall medium-term risk when combining modules and indicators.
- Stress-test probabilities (2022–2027):
  - Prob. of missed crisis (if stress not predicted): 27.3 pct
  - Prob. of false alarm (if stress predicted): 10.2 pct

### Debt coverage, disclosures, and structure
- Coverage in the DSA:
  - Budgetary central government: Yes
  - Extra budgetary funds (EBFs): No
  - Social security funds (SSFs): Yes
  - State governments: Yes
  - Local governments: Yes
  - Public nonfinancial corporations: No
  - Central bank: Yes
  - Other public financial corporations: Yes
- Reporting on intra-government debt holdings shows consolidation and holder/issuer tables (figures provided).
- Public debt structure indicators (figures in source): debt by currency (foreign currency = 0.0 in projections), public debt by holder, by governing law, by instrument, and by maturity (residual maturity: 6. years).

### External sector assessment (Appendix III highlights)
- Overall assessment: The external position in 2021 was moderately weaker than the level implied by medium-term fundamentals and desirable policies.
- Current account (CA):
  - CA deficit increased from 2.9 percent of GDP in 2020 to 3.4 percent in 2021 (cyclically adjusted terms: from 2.7 to 3.0 percent).
  - The CA deficit is projected to decline below 2 percent of GDP over the medium term based on an increase in public saving due to gradual fiscal consolidation.
  - EBA model estimates (2020): cyclically adjusted CA balance of -3.1 percent of GDP; cyclically adjusted CA norm of -1.2 percent of GDP; EBA model CA gap = -1.9 percent of GDP for 2020. IMF staff assesses the 2021 cyclically adjusted CA to be 1.1 percent of GDP lower than the level implied by medium-term fundamentals and desirable policies, with a range between -1.7 and -0.5 percent of GDP.
- Net international investment position (NIIP) and foreign assets/liabilities:
  - NIIP: -64.9 percent of GDP in 2021 (averaged about -46 percent of GDP during 2016–19; strengthened slightly from -67.1 percent in 2020).
  - 2021 composition: Gross Assets: 65.5; Debt Assets: 17.7; Gross Liab.: 110.1; Debt Liab.: 56.0 (percent of GDP).
  - Assessment: Financial stability risks could surface if there is an unexpected decline in foreign demand for U.S. fixed income securities; this risk remains moderate given the dominant status of the U.S. dollar. Around 60 percent of U.S. assets are in the form of FDI and portfolio equity claims.

*Source: IMF staff (Appendix II. Sovereign Risk and Debt Sustainability Assessment).*

### 0.8 percent GDP to account for the effects of COVID-19 on the travel (0.2 percent of GDP), transport (0.1 percent of

### 1usaea2022001 - 0.8 percent GDP to account for the effects of COVID-19 on the travel (0.2 percent of GDP), transport (0.1 percent of

### Current Account and CA Norm
- Adjustment of 0.8 percent GDP to account for the effects of COVID-19 on: travel (0.2 percent of GDP), transport (0.1 percent of GDP), medical (0.1 percent of GDP), and shift in composition of household consumption (0.4 percent of GDP).
- Estimated standard error of the CA norm: 0.6 percent of GDP.
- 2021 (% GDP):
  - CA: -3.5
  - Cycl. Adj. CA: -3.1
  - EBA Norm: -1.2
  - EBA Gap: -1.9
  - COVID-19 Adj.: 0.8
  - Other Adj.: 0.0
  - Staff Gap: -1.1

### Real Exchange Rate (REER)
- Background:
  - REER appreciated by 1.6 percent in 2020 (pa).
  - REER depreciated by 3.8 percent in 2021 (pa).
  - The 2021 depreciation brought the REER to the average level that prevailed in 2016.
- Assessment:
  - Indirect estimates of the REER (based on staff’s current account assessment) imply the exchange rate was overvalued by 8.6 percent in 2021 (applying the estimated elasticity of 0.12).
  - The EBA REER index model suggests an overvaluation of 2.4 percent.
  - The EBA REER level model suggests an overvaluation of 9.9 percent.
  - Staff assesses the 2021 midpoint REER overvaluation to be 8.6 percent, with a range of 3.8-13.5 percent (range obtained from the CA account standard error and the corresponding CA elasticity).

### Capital and Financial Accounts: Flows and Policy Measures
- Background:
  - The financial account balance was about –3.1 percent of GDP in 2020, compared with –3.5 percent of GDP in 2020.
  - Decrease in net direct investment from 0.5 to 0.2 percent GDP.
  - Changes in portfolio investment (–2.3 to –10 percent) and other investments (–1.3 to –2.5 percent) broadly canceling each other out.
- Assessment:
  - The US 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.

### FXI and Reserves
- 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.

### Appendix IV — Implementation of 2020 FSAP Recommendations (Selected items)
- Systemic Risk Oversight and Macroprudential Framework:
  - Provide an explicit financial stability mandate to all federal FSOC members: Not Implemented.
  - Prioritize development of macroprudential tools to address nonbank sector risks (hedge funds, open-end funds, money market funds): Partially Implemented.
  - Intensify efforts to close data gaps (CLOs and repo markets): Partially Implemented.
- Banking Regulation and Supervision:
  - Review prudential requirements for non-internationally active banks; consider extending full LCR: Implemented.
  - Streamline regulatory requirements and consider rewriting key prudential guidance as regulation: Not Implemented.
  - Introduce heightened governance standards for large and complex BHCs: Partially Implemented.
- Insurance Regulation and Supervision:
  - Increase independence of state insurance regulators: Not implemented.
  - Move all in-force life insurance to PBR after five-year transition and recalibrate RBC: Not implemented.
  - Develop consolidated group capital requirement similar to ICS: Not implemented.
- Regulation, Supervision, and Oversight of FMIs:
  - Increase CFTC resources for CCP supervision and strengthen rule-approval: Implemented.
  - Collaborate on CCP risk management practices and adopt consistent conservative standards: Partially Implemented.
  - Develop systemwide CCP supervisory stress tests: Implemented with regard to collaboration and implementation of robust risk management standards; Partially Implemented to reflect continued discussion by authorities.
- Securities Regulation and Supervision:
  - Give CFTC and SEC greater independence to determine resources: Not Implemented.
  - SEC-led liquidity stress testing for mutual funds and MMFs: Partially Implemented.
  - Conclude implementation of new broker-dealer capital rules; finalize MWCBs; deliver Consolidated Audit Trail: Fully Implemented (broker-dealer capital rules); Fully Implemented (MWCBs made permanent March–April 2022); Fully Implemented (Consolidated Audit Trail delivery tasked to SROs).
  - Increase scrutiny of new registrants and reduce reliance on self-attestations: Partially Implemented.
- AML/CFT:
  - Legislated collection of beneficial ownership at formation (Corporate Transparency Act, AML Act of 2020): Implemented.
  - Ensure advisers, lawyers, accountants, and company service providers effectively regulated for AML/CFT: Partially Implemented.
- Systemic Liquidity:
  - Promote fungibility of Treasury Securities and Reserves by adjusting Discount Window assumptions in liquidity metrics: Not Implemented.
  - Continue to operate regular fine-tuning OMOs (reserves in excess of $3 trillion): Implemented.
  - Advance arrangements for liquidity to systemic nonbanks and CCPs; reconsider restrictions on bilateral ELA: Not Implemented.
  - Develop backup plans if BNYM unable to settle/clear repo transactions: Partially Implemented.
  - Enhance foreign currency liquidity support arrangements to banks and systemically important CCPs: Not Implemented.
- Crisis Preparedness and Management:
  - Intensify crisis preparedness (FSOC role): Partially Implemented.
  - Use agency discretion to subject wider array of firms to RRP: Partially Implemented.
  - Continue yearly DFA Title II plans, resolvability assessments, and CMG discussions: Implemented.
  - Extend OLA powers to cover FBOs’ U.S. branches; ensure equal depositor preference for overseas branch deposits; introduce powers to give legal effect to foreign resolution measures: Not Implemented.

### Fund Relations and Statistical Issues (selected)
- Fund Relations (as of June 13, 2022):
  - Quota: 82,994.20 (SDR Million), 100.00 percent of Quota.
  - IMF's Holdings of Currency (Holdings Rate): 58,289.69 (SDR Million), 70.23 percent of Quota.
  - Reserve Tranche Position: 24,757.54 (SDR Million), 29.83 percent of Quota.
  - SDR Department net cumulative allocation: 114,861.89 (SDR Million), 100.00 percent of Allocation.
  - SDR Department Holdings: 118,342.72 (SDR Million), 103.03 percent of Allocation.
  - Outstanding Purchases and Loans: None.
  - Financial Arrangements: None.
  - Projected Payments to Fund (SDR Million; forthcoming):
    - Charges/Interest: 1.47 in 2022, 1.47 in 2023, 1.47 in 2024, 1.47 in 2025, 1.47 in 2026.
- Exchange Rate Arrangements:
  - The exchange rate of the U.S. dollar floats independently and is determined freely in the foreign exchange market.
  - The United States has accepted obligations under Article VIII, Sections 2(a), 3 and 4 and maintains an exchange system free of multiple currency practices and restrictions on current international payments, except for measures imposed for security reasons.
  - Last notification of security-related measures: April 21, 2022.
- Article IV Consultation:
  - The 2022 Article IV consultation was concluded on July 11, 2022.
  - Staff Report publication referenced as IMF Country Report No. [22/xxx].
  - 2022 Article IV discussions: May 31–June 15, 2022.
  - Concluding meetings with Chair Powell and Treasury Secretary Yellen: June 23-24, 2022.
  - Press conference on consultation: June 27, 2022.
- Statistical Issues (as of June 13, 2022):
  - Data provision is adequate for surveillance.
  - United States adherent to SDDS Plus since February 18, 2015; metadata posted on DSBB.
  - No data ROSC has been conducted.
- Table of Common Indicators Required for Surveillance (As of June 27, 2022) — selected entries and dates of latest observation:
  - Exchange rates: Same day.
  - International reserve assets and reserve liabilities of the monetary authorities: 2022 M4 (Date received May 31).
  - Reserve/base money: 2022 M5 (Date received Jun 22).
  - Broad money: 2022 M5 (Date received Jun 22).
  - Central bank balance sheet: Jun 22 (Date received Jun 22; Weekly).
  - Consolidated balance sheet of the banking system: 2022 Q1 (Date received Jun 11).
  - Consumer price index: 2022 M5 (Date received Jun 10).
  - Revenue, expenditure, balance and composition of financing—general government: 2022 Q1 (Date received Jun 24).
  - Revenue, expenditure, balance and composition of financing—central government: 2022 M5 (Date received Jun 10).
  - Stocks of central government and central government-guaranteed debt: 2022 M6 (Date received Jun 30).
  - External current account balance: 2022 Q1 (Date received Jun 23).
  - Exports and imports of goods and services: 2022 M4 (Date received Jun 7).
  - GDP/GNP (1st release): 2022 Q1 (Date received Apr 29).
  - Gross External Debt: 2021 Q4 (Date received Mar 31).
  - International Investment Position: 2021 Q4 (Date received Mar 29).

*Source: INTERNATIONAL MONETARY FUND — United States: Staff Report for the 2022 Article IV Consultation (informational annex and Appendix IV; June 24, 2022).*

### 1.      Data. New data was released on June 29–30 to update the estimates of first

### 1usaea2022001 - 1.      Data. New data was released on June 29–30 to update the estimates of first

### Data revisions and May data highlights
- Personal consumption expenditure was considerably weaker in the first few months of the year than previously thought.
- The level of consumption in April was revised down by 0.8 percent (with a 1.5 percent reduction in durable goods consumption and smaller reductions in demand for services and nondurables).
- The April revision implied a higher household saving rate during the first four months of the year.
- Personal consumption expenditure contracted in May by 0.4 percent (relative to the revised April outturn).
- There was a particularly large 3.5 percent reduction in the demand for durables in May relative to April.
- The composition of first quarter GDP was revised to reflect:
  - Lower real growth in consumption, which fell from 3.1 to 1.8 percent.
  - A smaller decumulation of nonfarm inventories.
- In May:
  - Headline PCE inflation was 0.6 percent (6.3 percent year-on-year).
  - Core PCE inflation was 0.3 percent (falling to 4.7 percent year-on-year), somewhat lower than staff had forecast.
  - Median PCE inflation rose to 0.6 percent (or 4.8 percent year-on-year).

### Implications for the outlook and forecast revisions
- The data revisions and new May data indicate significantly less momentum in private consumption and a smaller deployment of household savings accumulated over the past two years.
- This suggests a more front-loaded deceleration, with a drawdown of savings less supportive of demand during the remainder of this year.
- Staff revisions:
  - Revised down growth for 2022 from 2.2 to 1.0 percent Q4/Q4.
  - This is expected to reduce the annual average growth rate from 2.9 to 2.3 percent in 2022.
  - Annual average growth rate is revised from 1.7 to 1.0 percent in 2023.
  - Modestly lowered core PCE inflation in 2022 from 4.6 to 4.4 percent Q4/Q4.

### Administration statement: macroeconomic assessment and policy priorities
- Recovery and fiscal support
  - The U.S. economy grew by 5.7 percent in 2021, the fastest pace in nearly four decades.
  - The American Rescue Plan (ARP) played a central role in restoring growth and protecting vulnerable households.
  - Household balance sheets are described as healthy; support helped households secure employment, pay down debt, and enter the post-pandemic workforce with finances intact.
- Growth expectations
  - The Administration expects growth to be largely in line with the IMF forecast of around 2 percent in 2022, and 1 percent for 2023.
  - Firms added 2.4 million jobs in the first five months of 2022.
  - The unemployment rate is holding just above the 3.5 percent five-decade low reached in late 2019 and early 2020.
- Inflation and monetary policy
  - Restoring price stability is a top priority.
  - Inflation rise attributed to strong demand pressures, supply constraints, and Russia’s war against Ukraine.
  - The Federal Reserve is characterized as the first and most important defense against inflation.
  - Recent policy actions noted include a 75 basis point hike taken on June 15 and initiation of a rapid reduction in the Federal Reserve’s balance sheet.
  - The Administration expects a pathway to address inflation without a recession and agrees with staff’s baseline assessment.
- Fiscal policy priorities
  - Focus on preventing scarring, making growth more equitable and greener.
  - Administration aims to build a fair and stable tax system, modernize the Internal Revenue Service, and support international tax reform including a global minimum tax.
  - Continued emphasis on tax credits and policies to shift incentives away from fossil fuels toward renewable energy and to support higher labor force participation, especially among women.
- Financial stability
  - The U.S. financial system has remained resilient through multiple shocks over the past two years.
  - Limited direct exposure to financial spillovers from Russia’s war against Ukraine to date.
  - Authorities are monitoring risks from rising interest rates and sectors such as commercial real estate.
  - Measures to mitigate risks from nonbank financial institutions (NBFIs) and digital assets are ongoing; FSOC continues coordinated work.
  - The Federal Reserve established:
    - The Standing Repurchase Agreement (repo) Facility as a backstop in money markets.
    - The FIMA Repo facility, available to approved central banks and monetary authorities with accounts at the Federal Reserve Bank of New York.
- Climate and green transition
  - Addressing climate change is an Administration priority with support for Fund analysis on a green jobs transition.
  - The Bipartisan Infrastructure Law (BIL) included investments for carbon capture, hydrogen energy development, reclaiming abandoned mine lands, and upgrades to the national electricity grid.
  - Executive actions highlighted: Defense Production Act authorization for clean energy manufacturing, a Methane Emissions Reduction Action Plan, new lease sales for offshore wind, and strong passenger vehicle fuel economy standards.
  - The Commerce Department’s $3 billion program under the ARP will support workforce development in underserved communities.
  - The Justice 40 initiative aims to invest 40 percent of key programs; $29 billion thus far in 2021–22, into historically marginalized, underserved and/or pollution-burdened communities.
  - FSOC published a report identifying climate change as an emerging threat to U.S. financial stability with over 30 recommendations; a new FSOC staff-level committee was established to promote information sharing and address climate-related financial risks.
- International context and trade
  - The U.S. pledged to donate at least 1.1 billion doses of COVID-19 vaccines before 2023 and had delivered about half of this amount to date.
  - The U.S. current account deficit has widened in the near term due to stronger U.S. growth relative to major trading partners.
  - The Administration emphasizes the need for other countries with persistent, excessive current account surpluses to support domestic demand and avoid excess reserve accumulation.
  - Trade policy aims to ensure inclusive, equitable, and worker-centered growth while securing supply chain resilience and defending against unfair competition from non-market economies.
  - The Administration is considering a WTO reform agenda and enhanced compliance and transparency.
- Response to Russia’s war against Ukraine
  - Spillovers from the war have had an extraordinary negative impact on the global economy.
  - The United States is working with allies, partners, and international financial institutions to respond, including addressing rising global food insecurity through initiatives such as Feed the Future.

*Italicized source attribution: Content from 1usaea2022001 (United States), IMF staff report and Administration statement, July 2022.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1usaea2022001.pdf_