## 1usaea2023001 ## Source details **Canonical URL:** [1usaea2023001](https://www.imf.org/-/media/files/publications/cr/2023/english/1usaea2023001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1usaea2023001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1usaea2023001.pdf.json) --- ### Labor market and unemployment - Unemployment - Unemployment is expected to rise slowly to close to 4½ percent by end-2024. - Employment growth is expected to decline relative to 2022 leading to a steady rise in unemployment with a peak that is slightly below 4 ½ percent at the end of 2024. - Participation and composition - Prime age labor force participation has risen above its pre-pandemic peak. - The labor force has failed to return to its pre-pandemic trend due to aging demographics and early retirements. - A rapid upswing in immigration in 2022 has returned the foreign-born labor force to its pre-pandemic trend, easing shortages in accommodation, food services and wholesale trade. - Wages and real incomes - Average nominal wage growth accelerated from around 3 percent in 2020 to 5–6 percent in 2022. - Since 2022Q3, year-on-year median wage gains have exceeded inflation. - Wage increases have spread across the wage distribution; real disposable household income has been on an upward path since mid-2022. - Productivity and vacancies - Productivity gains seen in 2020–21 have largely been reversed; labor productivity has fallen unusually large from a historical perspective. - Vacancy rates remain high, indicating unmet demand for labor, particularly in lower wage, service sector jobs. - Distributional outcomes - Women and African Americans see unemployment at historical lows; poverty reductions during the pandemic have been largely unwound in 2022. ### Inflation and price dynamics - Recent trends and drivers - Headline inflation fell from 7 percent in June 2022 to 4.2 percent in March 2023. - Resilient demand and a strong labor market have contributed to more persistent inflation. - Goods inflation has moderated; shelter price growth is expected to slow in coming months. - Past nominal wage increases are feeding into non-shelter service prices. - Forecasts and assumptions - Core and headline PCE inflation are expected to continue falling but will remain materially above the Federal Reserve’s medium-term target throughout 2023 and 2024. - Inflation is expected to fall slowly to reach around 4 percent by end-year (2023). - Forecast assumptions include a decline in the vacancy-unemployment ratio to around 1.2 by end-2023 and 1-year ahead inflation expectations below 3 percent by end-year. - Quantified pass-through and risks - Based on recent history, the lagged effect of wage increases in 2022 would add around 0.6 percent to non-shelter services inflation by end-2023. - Historically, the contemporaneous response of consumer prices to higher wages in non-shelter services has been 9 percent; in 2021-22 pass-through rose to 20 percent. - Risks to the path for inflation are skewed upwards; upside risks from persistent labor market tightness could sustain rapid nominal wage increases. ### Monetary policy: stance, implementation, and guidance - Federal funds rate path and rationale - Bringing inflation back to target will require an extended period of tight monetary policy with the federal funds rate remaining at 5¼—5½ percent until late in 2024. - Maintaining the federal funds rate at 5¼-5½ percent until late in 2024 would imply an ex-ante real policy rate that peaks at a little over 3 percent and remains above neutral for the following two years. - If the economy proves less responsive to higher interest rates and/or inflation proves more persistent, the path for the federal funds rate will need to go higher. - Liquidity provision and stability trade-off - The Federal Reserve can simultaneously provide temporary liquidity support and tighten monetary policy through higher policy rates. - Provision of liquidity through the discount window and the Bank Term Funding Facility (Bank Term Funding Program) should be sufficient to address near-term liquidity needs of banks while keeping focus on disinflation. - The Fed’s discount window began to apply the same margins for securities as under the Bank Term Funding Program; on March 15, discount window rules were changed to narrow the spread between the primary credit rate and the federal funds rate and to allow depository institutions to borrow for up to 90 days. - Communication recommendations - The Federal Reserve should communicate carefully how it assesses incoming data and provide clear guidance on what this means for the expected path of the policy rate. - Greater emphasis should be placed on the need for interest rates to remain at high levels for an extended period of time. - Communications should continue to underscore that the FOMC’s forward guidance is not set in stone and actual policy outcomes will depend critically on incoming data. - No interest rate cuts are expected this year (2023). ### Fiscal policy, public debt, and the debt ceiling - Short-run stance and recommendation - On a general government basis, fiscal policy is expected to be procyclical in 2023. - With the economy operating well above potential and inflation persistent, there is a strong case for greater fiscal restraint in 2023–24 to lessen the burden on the Federal Reserve in disinflating the economy. - The debt ceiling should be immediately raised or suspended by Congress. - A more permanent solution is recommended to avoid recurrent debt limit brinkmanship by ensuring that, once appropriations are approved, the corresponding space on the debt ceiling is automatically provided. - Medium-term adjustment needs and options - A more significant fiscal adjustment will be required over the medium-term to put public debt on a decisively downward path; staff baseline aims to gradually raise the primary general government surplus over the medium-term to around 1 percent of GDP (federal government target: 1.5 percent of GDP primary surplus). - Specific medium-term measures: tax increases (including "even for those earning less than US$400,000 per year"), addressing structural imbalances in social security and Medicare, scaling back poorly targeted tax expenditures, closing carried interest/step-up basis, phasing in consumption or carbon taxes, raising corporate tax or moving toward a cashflow tax, containing health care costs and expanding Medicare prescription drug price negotiation. - Fiscal balances and projections (selected) - The federal government structural primary deficit improved by around 5¼ percent of GDP in 2022. - The federal government primary structural balance is expected to improve by around ¾ percent of GDP in FY 2023 and ½ percent of GDP in FY2024. - At the general government level, the primary balance is expected to worsen by around 2¾ percent of GDP in 2023 due to increased state and local deficits and statistical issues linked to student loan relief recording. - Debt trajectory (selected projections) - Federal debt held by the public (% of GDP): 79.4 (2019), 99.8 (2020), 98.4 (2021), 97.0 (2022), 96.6 (2023), 98.4 (2024), 101.2 (2025), 103.6 (2026), 105.8 (2027), 108.3 (2028) [and projections to 2032]. - General government gross debt (% of GDP): 108.7 (2019), 133.5 (2020), 126.4 (2021), 121.4 (2022), 121.8 (2023), 124.6 (2024), 127.5 (2025), 130.1 (2026), 132.5 (2027), 134.9 (2028). ### Protectionism, trade policy, and industrial policy assessment - Recent legislation - The Inflation Reduction Act, the CHIPS Act, and the Build America, Buy America Act include provisions designed to favor goods and services produced in the U.S. or in North America. - Risks and recommendations - Protectionist provisions distort trade and investment, risk fragmenting global supply chains, and could trigger retaliatory actions. - Such “Made in America” policies are assessed as ultimately bad for U.S. growth, productivity and labor market outcomes. - Recommendations: roll back tariffs and trade distortions introduced over the past five years (including statutory review of Section 301 tariffs on China), avoid favoring domestic producers over imports, bolster competitiveness via worker training and infrastructure, and actively engage with trading partners to sustain open trade policies and strengthen the WTO (restore dispute settlement by 2024, conclude new WTO-based market-opening agreements, pursue WTO reform). ### Financial oversight, banking stress, and regulatory responses - Recent failures and systemic concerns - Failure of Silicon Valley Bank (SVB) driven by sizable unrealized losses on assets and a substantial share of uninsured deposits; deposit outflows forced asset liquidations, realizing losses and accelerating outflows. - Regulators invoked the systemic risk exemption and guaranteed all deposits at SVB and Signature Bank; any losses from expansion of guarantees are to be recouped by a special assessment on deposit insurance premia; equity and certain unsecured debt holders were required to bear losses. - The Federal Reserve launched the Bank Term Funding Program and adjusted discount window rules to provide liquidity against high-quality securities valued at par. - These efforts were able to quickly stabilize deposit outflows and restore confidence to the broader banking system. - System-wide implications and credit outlook - Since end-February, around US$500 billion (or close to 3 percent of total deposits) have left the banking system, over half of which is from smaller banks. - Smaller banks sold around 17 percent of their holdings of agency mortgage-backed securities and reduced their lending. - On May 1, First Republic Bank was closed and sold to J.P. Morgan. - As resources move out of regional banks, credit growth is likely to weaken further; larger banks and market financing may be unable to fully substitute, particularly for lending to smaller firms and commercial real estate. - Regulatory and supervisory recommendations - Prudential requirements should be made more stringent for mid-sized banks, subjecting them to similar requirements as larger banks. - Mid-sized banks should be included in the annual supervisory stress testing process and have capital and liquidity requirements aligned with the Basel framework (including LCR and NSFR). - Strengthen stress testing framework to assess exposure to interest rate risk, examine a broader range of scenarios (including rate increases), and implement integrated solvency-liquidity stress tests. - Recalibrate supervisory escalation processes and reconsider margins/discount window practices (practice of not applying margins viewed as extraordinary and to be discontinued in March 2024 when the Bank Term Funding Program is scheduled to expire). ### Nonbank financial risks and Treasury market resilience - Nonbank vulnerabilities - High leverage, liquidity and duration mismatches, and interconnectedness between non-bank financial institutions and banks pose additional risks; flows into money market funds accelerated following regional bank failures. - Crypto-related entity failures underscore need for greater oversight, including consumer protection. - Commercial real estate has significant leverage and near-term financing needs; stresses could spill over to nonbanks and banks. - Treasury market measures - Data on Treasury market operations is improving; a standing repo facility has been established by the Fed to provide liquidity. - Work underway to establish a Treasury buyback program to support market liquidity and to translate interagency proposals (all-to-all trading, greater use of central clearing) into institutional changes. - Recommendation: increase dealer capacity to intermediate the Treasury market by modifying the Supplementary Leverage Ratio where appropriate. ### Supply-side policies and structural reforms - Policy priorities (to be implemented within a fiscal envelope ensuring a downward path for public debt) - Incentivize labor force participation: expand the earned income tax credit, provide childcare subsidies, require paid family leave. - Boost human capital: investments to expand healthcare coverage, increase access to pre-K and higher education. - Infrastructure: continue increases in infrastructure investment, including to increase resilience to climate change. - Tax changes: raise revenue, make system more progressive and equitable, and curtail base erosion and profit shifting. ### Emissions reduction, IRA impacts, and climate transition - IRA and emissions - Policies in the Inflation Reduction Act have the potential to significantly decarbonize the U.S. economy, lowering greenhouse gas emissions by around 36 percent by 2030 (relative to 2005 levels). - GMMET preliminary estimate: increase in the share of electricity generation from renewables by 2030 by around 19 percentage points relative to a baseline without the IRA. - IRA directs almost US$400 billion to climate-related tax credits, subsidies, grants and loans (CBO estimates); GMMET simulations suggest fiscal cost could be larger (an additional 1 percent of GDP over 10 years). - IRA climate measures would add around 0.1 percent to the level of GDP by 2030, accounting for financing through higher corporate income taxes. - Remaining gap and recommended additional steps - Further efforts are needed to reach the U.S. objective of a 50–52 percent decline by 2030; options include tightening state or federal regulations (fuel efficiency, CO2 emissions from power plants), prioritizing carbon incentive changes in the Farm Bill, supporting carbon sequestration, and building social consensus to begin pricing carbon. - Labor market transition - The U.S.’s very flexible labor markets will be an advantage in facilitating decarbonization. - Training and financial support for the most affected workers would facilitate faster labor reallocation and lower societal transition costs. ### External position, exchange rates, and sanctions - External position - The 2022 external position "remains moderately weaker than the level implied by medium-term fundamentals and desirable policies (Appendix III)." - The current account deficit "rose significantly during the pandemic" and "is expected to decline in 2023 and continue falling over the medium-term" as demand rebalances and fiscal support is unwound. - The current account balance (% of GDP) projections include: -3.7 (2022), -2.8 (2023), -2.5 (2024), -2.4 (2025), -2.3 (2026). - Exchange rate developments - "The real effective exchange rate appreciated by around 10 percent from January to October 2022 but subsequently reversed course, depreciating 6 percent in the past six months." - "The dollar is judged to be modestly overvalued." - Sanctions and capital flow measures - In coordination with other countries, the U.S. continues to impose sanctions on Russia and Belarus; measures include asset freezes, financing restrictions, expansion of specially designated nationals, and investment/import/export restrictions. Some measures constitute capital flow management measures for national or international security reasons. ### Housing and mortgage-sector stability - Despite a significant reduction in residential construction and mortgage initiation, financial stability risks from the ongoing housing downturn appear contained. - Mortgages have been issued based on generally strong underwriting standards. - "95 percent of mortgages are at fixed rates" which insulates homeowners from the ongoing rise in interest rates. - Virtually all homeowners have a sizable home equity buffer, implying a large decline in house prices would be required for mortgages to become underwater. - Some bank and nonbank mortgage providers will need to adapt business models to cope with significant reductions in refinancing activity and new mortgage origination. ### Macroeconomic baseline and key projections (selected numeric highlights) - Growth and activity - Annual average growth will slow to 1.7 percent in 2023 and to 1 percent in 2024. - Quarter-on-quarter growth is expected to bottom out in mid-2024 and start picking up in the second half of the year. - Labor market and productivity - Unemployment rate (selected): 3.7 (2019), 8.1 (2020), 5.4 (2021), 3.6 (2022), 3.7 (2023), 4.2 (2024), 4.3 (2025). - Forecast assumes a slow recovery of labor productivity growth to around 1¼ percent by end-2024. - Inflation and rates - PCE inflation (q4/q4): 1.4 (2019), 1.1 (2020), 5.7 (2021), 5.7 (2022), 3.8 (2023), 2.6 (2024). - Fed funds rate (period average): 2.2 (2019), 0.4 (2020), 0.1 (2021), 1.7 (2022), 5.1 (2023), 5.3 (2024). - Public finances (selected) - Federal balance (% of GDP): -4.7 (2019), -14.9 (2020), -12.3 (2021), -5.5 (2022), -5.6 (2023), -5.7 (2024). - Current account balance (US$ billions, memorandum): -446 (2019), -620 (2020), -846 (2021), -944 (2022), -745 (2023), -714 (2024). ### Risk assessment (selected high-likelihood / high-impact risks and policy responses) - Global risks - Intensification of regional conflict(s): Likelihood: High; Expected Impact: Medium. Policy response: increase resilience of financial intermediation and supply chains; adjust monetary tightening pace. - Deepening geoeconomic fragmentation: Likelihood: High; Expected Impact: Medium. Policy response: invest in worker training and infrastructure; engage major trading partners to maintain open trade. - Monetary policy miscalibration: Likelihood: Medium; Expected Impact: High. Policy response: signal ex-ante real rate will need to go above neutral and remain there; improve Fed communications. - Domestic risks - More abrupt tightening of financial conditions from stickier-than-expected inflation: Likelihood: Medium; Expected Impact: High. Policy response: targeted liquidity measures if market functioning is compromised; recalibrate monetary withdrawal. - Systemic financial instability (deposit outflows): Likelihood: Medium; Expected Impact: High. Policy response: strengthen prudential framework; provide timely emergency lending; ensure functioning of key markets. - Persistently slow recovery in labor force participation: Likelihood: Medium; Expected Impact: High. Policy response: supply-side policies (paid family leave, childcare, EITC, immigration reform). ### Governance, AML/CFT, and FSAP follow-up - Governance and AML/CFT priorities - The "2022 National Strategy for Combating Terrorist and Other Illicit Financing" outlines priorities to close AML/CFT gaps and make frameworks more effective. - FinCEN consultations on access to beneficial ownership information under the Corporate Transparency Act are underway. - Work continues on confiscating assets related to foreign corruption and repatriating them. - FSAP recommendations (selected unaddressed and in-progress items) - Unaddressed items include ensuring each Financial Stability Oversight Council member has an explicit financial stability objective, closing data gaps, finalizing market-wide circuit breakers, reviewing prudential requirements for category III and IV banks, and developing consolidated group capital requirements for insurance companies. - Progress: regulators are evaluating capital and liquidity requirements for non-internationally active banks; SEC proposed and adopted reporting and open-end fund liquidity proposals; CFTC and SEC proposed enhanced reporting for private funds; increased resources for CFTC; preparatory work on CCP supervisory stress tests ongoing. ### Staff appraisal (summary guidance) - Macroeconomic outlook and policy guidance - The U.S. economy has proven resilient to significant tightening in 2022; consumer demand remains strong with a modest slowdown expected in 2023 and growth strengthening in 2024. - Bringing inflation back to target will require the federal funds rate to remain at 5¼—5½ percent until late in 2024, and potentially higher if inflation proves more persistent. - Disinflation should be supported by tighter fiscal policy; a more significant medium-term fiscal adjustment is required to put public debt on a downward path. - Supply-side and structural policies in the President’s budget could address constraints but should be implemented within a fiscal envelope ensuring debt reduction. - Rapid deployment of green energy from the IRA hinges on overcoming permitting and electricity transmission siting delays; additional measures and worker support are recommended to reach climate targets. *Source: UNITED STATES — International Monetary Fund staff report (content unit 1usaea2023001).* ### 2024. Unemployment is expected to rise slowly to close to 4½ percent by end-2024. ### 2024. Unemployment is expected to rise slowly to close to 4½ percent by end-2024. ### Labor market and unemployment - Unemployment is expected to rise slowly to close to 4½ percent by end-2024. - Labor force participation: - Prime age labor force participation has risen above its pre-pandemic peak. - The labor force has failed to return to its pre-pandemic trend due to aging demographics and early retirements. - A rapid upswing in immigration in 2022 has returned the foreign-born labor force to its pre-pandemic trend, easing shortages in accommodation, food services and wholesale trade. - Wage dynamics: - Average nominal wage growth accelerated from around 3 percent in 2020 to 5–6 percent in 2022. - Since 2022Q3, year-on-year median wage gains have exceeded inflation. - Wage increases have spread across the wage distribution; real disposable household income has been on an upward path since mid-2022. - Labor productivity: - Productivity gains seen in 2020–21 have largely been reversed; labor productivity has fallen unusually large from a historical perspective. - Sectoral and distributional notes: - Vacancy rates remain high, indicating unmet demand for labor, particularly in lower wage, service sector jobs. - Women and African Americans see unemployment at historical lows; poverty reductions during the pandemic have been largely unwound in 2022. ### Inflation and price dynamics - Drivers and outlook: - Resilient demand and a strong labor market have contributed to more persistent inflation. - Goods inflation has moderated; shelter price growth is expected to slow in coming months. - Past nominal wage increases are feeding into non-shelter service prices. - Core and headline PCE inflation are expected to continue falling but will remain materially above the Federal Reserve’s medium-term target throughout 2023 and 2024. - Risks: - Risks to the path for inflation are skewed upwards. - Related box topics in source: - Learning and the Formation of Inflation Expectations by Consumers. - The Potential for Wage-Price Pass-Through. ### Monetary policy - Federal funds rate path: - Bringing inflation back to target will require an extended period of tight monetary policy with the federal funds rate remaining at 5¼—5½ percent until late in 2024. - If the economy proves less responsive to higher interest rates and/or inflation proves more persistent, the path for the federal funds rate will need to go higher. - Policy implementation and communications: - Achieving sustained disinflation will necessitate a loosening of labor market conditions that has not yet been evident in the data. - The Federal Reserve should communicate carefully how it assesses incoming data and provide clear guidance on what this means for the expected path of the policy rate. - Greater emphasis should be placed on the need for interest rates to remain at high levels for an extended period of time. - Communications should continue to underscore that the FOMC’s forward guidance is not set in stone and actual policy outcomes will depend critically on incoming data. ### Fiscal policy and public debt - Short-run stance: - On a general government basis, fiscal policy is expected to be procyclical in 2023. - With the economy operating well above potential and inflation persistent, there is a strong case for greater fiscal restraint in 2023-24. - A tighter fiscal stance would lessen the burden on the Federal Reserve in disinflating the economy. - Medium-term needs: - A more significant fiscal adjustment will be required over the medium-term to put public debt on a decisively downward path. - Achieving this adjustment will require a broad range of policies including both tax increases (even for those earning less than US$400,000 per year) and addressing structural imbalances in social security and Medicare. - The sooner this adjustment is put in place, the better. - Debt ceiling recommendation: - The debt ceiling should be immediately raised or suspended by Congress. - A more permanent solution should be developed to avoid recurrent debt limit brinkmanship through institutional changes that ensure that, once appropriations are approved, the corresponding space on the debt ceiling is automatically provided to finance that spending. - Fiscal balances and projections: - The federal government structural primary deficit improved by around 5¼ percent of GDP in 2022. - The federal government primary structural balance is expected to improve by around ¾ percent of GDP in FY 2023 and ½ percent of GDP in FY2024. - At the general government level, the primary balance is expected to worsen by around 2¾ percent of GDP in 2023 due to increased state and local deficits and statistical issues linked to student loan relief recording. ### Protectionism and trade policy - Recent industrial policy: - The Inflation Reduction Act, the CHIPS Act, and the Build America, Buy America Act include provisions designed to favor goods and services produced in the U.S. or in North America. - Risks and assessment: - Protectionist provisions distort trade and investment and risk fragmenting global supply chains and triggering retaliatory actions. - These “Made in America” policies are ultimately assessed as bad for U.S. growth, productivity and labor market outcomes. ### Financial oversight and stability - Recent failures and systemic concerns: - Recent bank failures highlight potential systemic risks posed by even relatively small financial intermediaries. - Focus has been on poor risk management by individual institutions, vulnerabilities created by the regulatory “tailoring” implemented in 2018, and inadequate supervisory oversight. - Questions arise about the insufficiently assertive stance taken by bank supervisors and the effectiveness of stress tests. - Recommended regulatory responses: - Prudential requirements should be made more stringent for mid-sized banks, subjecting them to similar requirements to larger banks. - Mid-sized banks should be included in the annual supervisory stress testing process and have capital and liquidity requirements aligned with the Basel framework. ### Supply-side policies and structural reforms - Policy priorities that could address supply constraints (to be implemented within a fiscal envelope ensuring a downward path for public debt): - Incentivize labor force participation by expanding the earned income tax credit, providing childcare subsidies, and requiring paid family leave. - Boost human capital through investments to expand healthcare coverage and increase access to pre-K and higher education. - Continue increases in infrastructure investment, including to increase resilience to climate change. - Tax changes to raise revenue, make the system more progressive and equitable, and curtail base erosion and profit shifting. ### Emissions reduction and climate policy - Impact of current legislation: - Policies in the Inflation Reduction Act have the potential to significantly decarbonize the U.S. economy, lowering greenhouse gas emissions by around 36 percent by 2030 (relative to 2005 levels). - Remaining gap and further steps: - Further efforts are needed to ensure emission reductions reach the U.S. objective of a 50–52 percent decline. - Additional steps could include tightening state or federal regulations (including on fuel efficiency standards and the regulation of CO2 emissions from power plants), prioritizing carbon incentive changes in the Farm Bill, supporting carbon sequestration, and building social consensus to begin pricing carbon. - Labor market transition: - The U.S.’s very flexible labor markets will be an advantage in facilitating decarbonization. - Training and financial support for the most affected workers would facilitate faster labor reallocation and lower societal transition costs, helping ensure broad societal support and avoiding leaving communities reliant on fossil fuels behind. *Source: UNITED STATES — International Monetary Fund staff report, May 26, 2023.* ### 13. The 2022 external position remains moderately weaker than the level implied by ### 13. The 2022 external position remains moderately weaker than the level implied by ### External position and exchange rates - The 2022 external position "remains moderately weaker than the level implied by medium-term fundamentals and desirable policies (Appendix III)." - The current account deficit: - "rose significantly during the pandemic" as consumer demand shifted away from services to tradeable goods and "a huge fiscal stimulus was put in place." - "is expected to decline in 2023 and continue falling over the medium-term" as demand rebalances back toward services and extraordinary fiscal support is unwound. - Exchange rate developments: - "The real effective exchange rate appreciated by around 10 percent from January to October 2022 but subsequently reversed course, depreciating 6 percent in the past six months." - "The dollar is judged to be modestly overvalued." ### Sanctions and capital flow management measures - In coordination with other countries, the U.S. continues to impose a range of sanctions on Russia and Belarus related to Russia’s ongoing war with Ukraine. - Sanctions developments over the past year include: - asset freezes or financing restrictions for designated entities, - expansion of the list of specially designated nationals, - various investment, import and export restrictions. - Some measures "constitute capital flow management measures introduced for reasons of national or international security." ### Banking sector stress and policy responses (SVB, Signature, First Republic) - Failure of Silicon Valley Bank (SVB): - Key vulnerabilities: "sizable unrealized losses on its assets" (wrong bets on Treasuries and mortgage-backed securities) and "a substantial share of its deposits that were not covered by deposit insurance." - Interaction of vulnerabilities: deposit outflows forced asset liquidations, realizing losses, weakening the balance sheet and accelerating deposit outflows (particularly uninsured corporate deposits). - Regulatory and policy responses: - Regulators invoked the systemic risk exemption and "guarantee[d] all deposits at the bank." - A similar blanket guarantee was provided to depositors at Signature Bank (which also had a large share of uninsured deposits). - The Federal Reserve launched the Bank Term Funding Program to provide liquidity to depository institutions against high-quality securities valued at par to reduce the need to sell these securities and realize losses in times of stress. - "The Fed’s discount window began to apply the same margins for securities as under the Bank Term Funding Program." - On March 15, discount window rules were changed "to narrow the spread between the primary credit rate and the federal funds rate and to allow depository institutions to borrow for up to 90 days." - Any losses from the expansion of the guarantee "are to be recouped by a special assessment on the deposit insurance premia that are levied on the banking system." Equity and certain unsecured debt holders were required to bear losses. - Effectiveness: "These efforts were able to quickly stabilize deposit outflows and restore confidence to the broader banking system." ### Systemic spillovers, deposit outflows, and credit implications - Market and system developments after SVB: - "Equity valuations for small banks have fallen and their cost of funding has risen (albeit modestly)." - On May 1, First Republic Bank was closed and sold to J.P. Morgan. - Since end-February, "around US$500 billion (or close to 3 percent of total deposits) have left the banking system, over half of which is from smaller banks." - In response, smaller banks have sold "a significant share (around 17 percent) of their holdings of agency mortgage-backed securities and reduced their lending." - Federal Home Loan Banks increased liquidity provision to commercial banks, funded through issuance of new debt. - Forward-looking credit implications: - "As the U.S. banking system is reshaped and resources move out of the regional banks to elsewhere in the financial system, it is likely that credit growth will weaken further." - "Larger banks and market financing may be unable to substitute for the role of regional banks (particularly in lending to smaller firms and commercial real estate)." - Despite the current tightening being faster and with larger increases in the policy rate, "at this stage, there is little to indicate a markedly different path of credit growth than in previous tightening cycles." ### Baseline macroeconomic outlook and labor market projections - Growth projections: - "Annual average growth will slow to 1.7 percent this year and to 1 percent in 2024." - On a sequential basis, quarter-on-quarter growth "is expected to bottom out in mid-2024 and start picking up in the second half of the year." - Labor market and productivity: - "Employment growth is expected to decline relative to 2022 leading to a steady rise in unemployment with a peak that is slightly below 4 ½ percent at the end of 2024." - Forecast assumes "a slow recovery of labor productivity growth (to around 1¼ percent by end-2024)." - "Slowing activity will steadily reduce job openings, allowing the vacancy-unemployment rate to fall below 1 by early 2024." - Authorities’ views summarized: - "Nearly 13 million jobs created during the course of the Biden administration" and growth exceeded administration forecasts. - Labor market achievements include record lows for Black or African Americans unemployment rates and gradual recovery of real wages. - Consumer demand remains strong; a mild slowdown is expected in 2023 with growth strengthening in 2024. - As supply chain disruptions resolve, the pathway to bring down inflation while maintaining a strong labor market is becoming more visible. ### Risks: higher for longer rates, financial stability, and the debt ceiling - Interest-rate and inflation risks: - There is a material risk that "persistent inflation will cause the Federal Reserve to raise the policy rate by significantly more than is currently expected." - Large share of household and corporate debt at long duration and fixed rates makes consumption and investment "less interest-sensitive than in past tightening cycles." - If rates rise more, "unrealized losses from holdings of long duration securities and loans would increase in both banks and nonbanks" and the cost of new financing could become "unmanageable." - Such tightening could trigger bankruptcies, worsen credit quality, and create potentially systemic stress, particularly for highly leveraged entities with large near-term gross financing needs. - "Recent failures of large, non-internationally active banks—which have, so far, had only a modest effect on credit conditions—could potentially be a prelude to more serious and ingrained systemic financial stability problems." - Debt ceiling risk and recommendation: - "Brinkmanship over the federal debt ceiling could create a further, entirely avoidable systemic risk to both the U.S. and global economy." - Since January, the Treasury has been using extraordinary measures to fund the federal government; these maneuvers "will soon reach their limit, potentially preventing the federal government from meeting its spending obligations." - Policy recommendation: "the debt ceiling should be immediately raised or suspended by Congress, allowing negotiations over the FY2024 budget to begin in earnest." - Additional institutional recommendation: "a more permanent solution to the recurring stand-off should be found through institutional changes that ensure that, once appropriations are approved, the corresponding space on the debt ceiling is automatically provided to finance that spending." - Other risks flagged by authorities: - Russian war against Ukraine, more persistent inflation deepening monetary policy trade-offs, stresses in bank and nonbank sectors, potential broad contraction in credit, rollover needs and portfolio stress in commercial real estate, intensifying climate change impacts and extreme weather, and transition risks as the globe shifts away from carbon-intensive energy. ### Inflation dynamics and disinflation prospects - Recent inflation trends: - Headline inflation fell from "7 percent in June 2022 to 4.2 percent in March 2023" due to lower fuel and energy costs. - "Core inflation has come down more slowly than had been expected" and "year-on-year median PCE inflation [has been] moving sideways for the past 7 months." - Goods and shelter dynamics: - Goods inflation: "has softened" since mid-2022 as supply chain constraints resolved and demand rotated toward services; downward trend in year-on-year goods inflation was "interrupted in March." - Shelter inflation: "With the housing market softening and prices falling, forward indicators suggest shelter inflation will soon start falling." - "Higher mortgage rates" have been a headwind; "home prices have been falling since mid-2022." - Although rental vacancies remain very low, the increase in average rents began to slow in mid-2022. - Consequence: shelter inflation should shift "from a current contribution of 1½ percent to year-on-year PCE inflation to adding less than 1 percent to PCE inflation by end-year." - Non-shelter services and wages: - "Based on recent history, the lagged effect of wage increases in 2022 would add around 0.6 percent to non-shelter services inflation by end-2023 (Box 4)." - Potential dampener: some compression of corporate margins; countervailing force: "still-weak labor productivity." - Getting inflation back to the Fed’s medium-term target would require "year-on-year wage inflation to slow from current levels to around 3–4 percent." - Inflation forecast: - "Inflation is expected to fall slowly to reach around 4 percent by end-year." - Forecast assumptions include "a decline in the vacancy-unemployment ratio to around 1.2 by end-2023 and 1-year ahead inflation expectations below 3 percent by end-year." - Upside risks: "persistent labor market tightness could foster continued rapid increases in nominal wages and prevent the forecasted decline in non-shelter services inflation." *International Monetary Fund — United States staff report (selected excerpts).* ### 28. To bring inflation firmly back to the Fed’s medium-term target will require an ### 28. To bring inflation firmly back to the Fed’s medium-term target will require an ### Monetary policy and inflation outlook - Maintaining the federal funds rate at 5¼-5½ percent until late in 2024 would imply an ex-ante real policy rate that peaks at a little over 3 percent and remains above neutral for the following two years. - Model estimates suggest such a path would be sufficient to slow demand, restore balance to the labor market, and lower wage and price inflation. - Models are calibrated on past experiences and so offer an imperfect guide to the unusual dynamics of the current conjuncture; if upside risks to inflation are realized, a correspondingly tighter monetary policy would be required to return inflation to target. - Inflation has moderated over the past several months but remains well above the Federal Reserve’s longer-run goal of 2 percent. - Inflation is expected to decline gradually over the next year and return to the Federal Reserve’s medium-term target by 2025. ### Liquidity provision and financial stability - The Federal Reserve can simultaneously provide temporary liquidity support and tighten monetary policy through higher policy rates. - Provision of liquidity through the discount window and the Bank Term Funding Facility should be sufficient to address near-term liquidity needs of banks, allowing monetary policy to remain focused on bringing inflation back to target. - There would be a high threshold whereby systemic market and/or banking system stress would warrant a lowering of the federal funds rate in the coming months. - Recent bank failures have contributed to tighter financial conditions. ### Communication and guidance - Given important uncertainties, the Federal Reserve should communicate carefully how it assesses incoming data and provide clear guidance on what this means for its expected path of the policy rate. - Greater emphasis in communications should be placed on the need for interest rates to remain at high levels for an extended period of time to help align financial conditions with the intended policy path. - Communications should underscore that the FOMC’s guidance is not set in stone and actual policy outcomes will depend critically on incoming data. - No interest rate cuts are expected this year. - Market-implied interest rate expectations are broadly in line with the rate path communicated by the FOMC. ### Labor market, wages, and inflation dynamics - The effects of policy tightening are gradually feeding through into the real economy, particularly affecting residential investment. - Supply and demand imbalances are gradually improving, with goods disinflation expected to continue and lower housing rents expected to feed through to the PCE price index with a lag. - There are tentative signs of slowing in the labor market, which should help produce the required slowdown in wage growth to cool non-shelter services inflation. - Longer term inflation expectations appear to be well-anchored in various surveys of households, markets, and analysts. ### Box 3 — Learning and formation of inflation expectations by consumers - Michigan Survey of Consumers responses show U.S. households have very different views on future inflation; both the mean and variance of the distribution increased over the past 3 years for 1-year and 5–10 year ahead expectations. - Females and those with lower income generally expect higher inflation, change their prediction most between surveys, and make the largest forecast errors. - A learning model with adaptive learning, where individuals update parameters over time and give more weight to recent observations, provides a good fit of historical average inflation expectations. - Varying the weight attached to new data captures differences across demographic groups; higher income individuals tend to be more attentive to incoming information than lower income individuals. - Incorporating adaptive learning into a closed economy DSGE model with an inertial Taylor rule suggests that bringing inflation back to the Fed’s 2 percent target by end-2024 would require a somewhat tighter monetary policy (with the near-term path for the federal funds rate around 25 bps higher) compared to a model where expectations are forward looking and “model consistent”. ### Box 4 — The potential for wage-price pass-through - Analysis uses a panel of 73 sectoral prices of the personal consumption expenditure (PCE) index matched to effective labor costs, with controls for nonwage input price changes, sectoral productivity growth, and time and sector fixed effects. - Historically, the contemporaneous response of consumer prices to higher wages in non-shelter services has been 9 percent. - In 2021-22, pass-through in non-shelter services rose to 20 percent (40 percent would be full pass-through given the average labor share in non-shelter services). - For the goods sector, wage-to-price pass-through remained insignificantly different from zero pre- and post-pandemic. - When wage growth is high (sector-quarters where wages are growing year-on-year at more than 4 percent, which makes up around 25 percent of the cases), pass-through in services sectors is almost three times as large as the average (i.e., 14 percent within the same quarter). - Pass-through rises to around 41 percent after one year during high wage growth episodes. - In 2021–22, around 70 percent of service sector-quarters in the sample experienced wage growth above 4 percent; this shift drove increased aggregate pass-through. ### Fiscal policy, recent legislation, and fiscal outlook - Significant fiscal legislation passed in late 2021 and 2022 includes: - Increased spending on roads, public transit, ports, airports, water, electricity, broadband and an electric vehicle charging network (US$517 billion over 10 years). - Measures to expand development and manufacturing of semiconductors (US$79 billion over 10 years). - Actions to facilitate transition to a less carbon intensive economy including clean energy investments and subsidies (US$386 billion over 10 years). - Federal subsidies for individuals’ purchase of health insurance (US$188 billion over 10 years). - Partially offsetting measures include: - A minimum 15 percent business tax for large corporations (US$222 billion over 10 years). - A 1 percent excise tax on stock buybacks (US$74 billion over 10 years). - Prescription drug price reform for Medicare (US$140 billion over 10 years). - Improving tax administration at the Internal Revenue Service (US$101 billion over 10 years). - The combined net impact of these initiatives is to add around 1½ percent of 2022 GDP to the fiscal deficit over the next 10 years (but with a negligible impact on the federal deficit in 2023). - The administration’s policy proposals (President’s Budget) aim to increase labor supply, build human capital, and invest in infrastructure, R&D, and clean energy; these are intended to increase potential growth and reduce poverty. - Despite low risk of sovereign stress, general government debt is expected to continue rising by 2–3 percent of GDP per year as aging-related expenditures feed into debt dynamics. - Putting debt onto a downward path by the end of this decade would require maintaining a 1 percent of GDP general government primary surplus (an adjustment of around 5 percent of GDP); even with such adjustment, debt would remain well above pre-pandemic levels until 2036. - Front-loading fiscal tightening in 2023-24 is recommended to lessen the burden on the Federal Reserve and potentially lessen financial stability risks; policies that both raise revenues and address entitlement imbalances will likely be necessary. ### Box 6 — Possible options to lower the federal debt - Scaling back poorly targeted tax expenditures (e.g., exemptions for employer-provided health care, principal residence, mortgage interest, and state and local taxes) could yield 1.4 percent of GDP per year. - Closing the “carried interest” provision and “step up basis” for capital gains tax could yield 0.1 percent of GDP per year. - Phasing in a federal consumption tax and/or a carbon tax (a 10 percent in a broad-based VAT would yield 2 percent of GDP per year) alongside well-designed assistance to protect the poor. - Eliminating federal subsidies and tax preferences for fossil fuel producers and carbon-intensive agriculture could yield 0.01 percent of GDP per year. - Raising the corporate tax rate and/or moving toward a cashflow tax (each 10 percent increase in the corporate income tax rate would yield 0.4 percent of GDP per year). - Reducing social security imbalances (indexing benefits to chained CPI saves 0.08 percent of GDP per year; subjecting earnings greater than $250,000 to social security payroll taxes would yield 0.4 percent of GDP per year). - Containing health care costs and expanding Medicare prescription drug price negotiation could save 0.1 percent of GDP. - Reducing the minimum threshold for the estate tax to pre-TCJA level could yield 0.02 percent of GDP per year. - Legislating the globally coordinated agreement on a minimum corporate tax to counter profit shifting and base erosion. ### Decarbonization and climate policy - IRA climate measures would allow for an overall reduction in emissions of around 36 percent by 2030 (relative to 2005 levels), below the administration’s goal of a 50–52 percent reduction by 2030. - The U.S. share of global emissions fell from around 18 percent in 2000 to 11 percent in 2019 and is expected to fall to 8 percent by 2030. - The administration is committed to halving its emissions by 2030 (relative to 2005 levels) and to achieve net zero emissions by 2050. - Achieving the full potential of the IRA depends on overcoming delays in permitting and inadequate electricity transmission infrastructure. - Additional steps to bridge the gap could include tightening state or federal regulations (fuel efficiency, clean energy standards, power plant emissions), prioritizing Farm Bill reauthorization to change incentives for carbon intensive agriculture and support carbon sequestration, and building social consensus to begin pricing carbon. - Training and financial support for the most affected workers would facilitate faster labor reallocation and lower societal costs of the transition. *International Monetary Fund — United States country chapter content as provided.* ### 40. Authorities’ views. The administration has advanced significant policies toward ### 1usaea2023001 - 40. Authorities’ views. The administration has advanced significant policies toward ### Climate policy, Inflation Reduction Act (IRA), and related estimates - The administration has advanced policies toward decarbonizing electricity and transportation, improving energy efficiency, cutting methane emissions, accelerating carbon capture and removal and other key technologies, and ending deforestation. - The Inflation Reduction Act (IRA) is described as a critical step toward the U.S. Nationally Determined Contribution consisting of cutting emissions by around half by 2030 (relative to 2005 levels). - The IRA embeds justice-oriented and place-based measures aimed at supporting disadvantaged communities, such as low-income communities and energy communities. - The U.S. pledged to double U.S. contributions to the Green Climate Fund and to mobilize Multilateral Development Banks to address climate change. Box 7 — Key IRA figures and model estimates (GMMET) - The IRA directs almost US$400 billion to climate-related tax credits, subsidies, grants and loans (CBO estimates). - More than half of these resources are targeted at incentivizing a shift to green energy production; the remainder funds programs including energy efficiency and transportation electrification. - GMMET preliminary estimate: increase in the share of electricity generation from renewables by 2030 by around 19 percentage points relative to a baseline without the IRA. - GMMET simulations suggest fiscal cost of incentives could be larger than CBO estimates, i.e., costing an additional 1 percent of GDP over 10 years. - IRA climate measures would add around 0.1 percent to the level of GDP by 2030, accounting for financing through higher corporate income taxes. - Rationale: expanding electricity generation capacity adds to the economy’s productive capacity, more than offsetting any decline in investment from higher taxes. - Emissions impacts: IRA measures expected to reduce carbon emissions by around 12 percent by 2030 (relative to a baseline without these policies), mainly driven by power and transportation sectors. - Combined effect would allow for an overall reduction in emissions of around 36 percent by 2030. - Estimates are sensitive to assumptions such as supply elasticities of fossil fuels, availability of skilled labor, and resolving permitting hurdles for renewables expansion. ### Cross-border effects in North America (Box 8) - IMF-ENV model projections (impacts shown relative to a baseline without IRA incentives): - Lower electricity prices at the consumer level by around 30 percent in the U.S. by 2030 (driven by price in electricity from renewables and nuclear). - U.S. household demand for fossil fuels declines by 4 percent by 2030 relative to baseline. - Resulting in 5 percent less production in the U.S. by 2030, and a marginal decline in U.S. demand for Canada oil and gas. - Small “carbon leakage” to the rest of the world: lower fossil fuel prices marginally increase consumption in Mexico and Canada, offsetting only around 1 percent of the reduction in U.S. emissions. - Canadian baseline in the model maintains a carbon price of $130 (enacted in 2021); Mexico’s price in the baseline is $3. ### Trade policy, fragmentation risks, and recommendations - Recent climate, infrastructure, and supply-chain resilience policies include protectionist “Made in America” provisions that discriminate against foreign producers (e.g., IRA, CHIPS Act, Build America, Buy America Act). - Such domestic content requirements and procurement preferences: - Distort trade and investment decisions. - Disrupt global supply relationships and risk triggering retaliatory responses. - Are judged to be ultimately bad for U.S. growth, productivity, and labor market outcomes. - Recommendation: Avoid favoring domestic producers over imports or creating incentives that lead to fragmentation of the global trade and investment system. - Specific policy recommendations: - Roll back tariffs and trade distortions introduced over the past five years, including through statutory review of Section 301 tariffs on China. - Bolster productivity and competitiveness via investments in worker training, apprenticeships, and infrastructure rather than discriminatory trade measures. - Actively engage with major trading partners to address core issues that risk fragmenting global trade (tariffs, farm and industrial subsidies, services trade). - Use new trade initiatives to further trade integration, not as discriminatory tools that create incentives for fragmentation. - WTO-related recommendations: - Redouble efforts to strengthen the WTO by avoiding discriminatory measures and restoring a well-functioning dispute settlement system by 2024. - Conclude new WTO-based market-opening agreements and pursue WTO reform to modernize and improve accessibility of the organization. ### Authorities’ stated industrial/innovation strategy - Administration view: pursuing a targeted industrial and innovation strategy to: - Capitalize on U.S. comparative advantages. - Make supply chains more resilient and secure. - Foster a shift to clean energy and establish high standards for labor and environmental practices. - Strategy aims: - Reverse hollowing out of the U.S. industrial base and counter unfair subsidies by non-market economies. - Target specific foundational sectors for growth and national security, deploying public resources to facilitate innovation and competition. - Coordinate with partners and allies, particularly on clean energy and semiconductors. - Move beyond traditional trade deals toward partnerships that promote supply chain diversification, clean energy transition, digital trust and openness, and enhanced labor and environmental protections. - Ongoing initiatives: Indo-Pacific Economic Framework for Prosperity, Americas Partnership for Economic Prosperity, U.S.-EU Trade and Technology Council. - Commitment to reform the multilateral trading system to benefit workers, accommodate national security interests, and ensure sustainable, low-carbon development; spearheading WTO reform. ### Financial stability risks, supervisory shortcomings, and policy responses - Systemic observations: - U.S. banking system overall is liquid and well-capitalized, but failures at relatively small intermediaries can create systemic instability (SVB and Signature together accounted for around 1½ percent of system assets). - Questions raised about the 2018 “tailoring” of financial regulations for smaller banks and the 2015 modification exempting banks with assets under US$250 billion from reflecting unrealized losses in available for sale holdings in regulatory capital. - Supervisory issues highlighted by SVB: - Supervisors were aware of business model problems and had issued warnings (liquidity stress testing, contingency funding, risk management and modeling), but supervisory actions did not prevent rapid growth or prompt fundamental operational changes. - The episode raises questions about discount window effectiveness (stigma and/or margins on collateral). - Regulatory and supervisory recommendations: - Recalibrate prudential requirements to be more stringent for mid-sized banks; subject them to requirements similar to large banks. - For non-internationally active banks (Category III and IV), implement: - Regular stress testing as part of the annual supervisory stress testing process. - Alignment of capital and liquidity requirements with the Basel framework, including coverage of the liquidity coverage ratio and the net stable funding ratio. - Institute more explicit rules and processes to escalate supervisory actions when banks fail to timely address supervisory warnings. - Discontinue the practice of not applying margins to collateral at the discount window; view that practice as extraordinary and discontinue in March 2024 (when the Bank Term Funding Program is scheduled to expire). - Stress-testing and interest-rate risk recommendations: - Strengthen stress testing framework and address prudential shortcomings for assessing exposure to interest rate risk. - Note: exemptions from annual supervisory stress tests introduced in 2018 meant SVB was not subject to stress testing despite having assets of US$221 billion by end-2022. - Dodd-Frank stress tests typically focus on negative macro scenarios that result in declines, not increases, in interest rates. - U.S. has not adopted the Basel methodology to identify banks with excessive interest rate risk exposure for more intensive supervision; no standardized disclosure requirement on interest rate risk exists. - Recommend examining a broader range of scenarios in stress testing and implementing a methodical process to assess interest rate risk in both available for sale and hold to maturity portfolios. - Undertake stringent integrated solvency-liquidity stress tests as a key policy response. ### Nonbank risks, market functioning, and Treasury market resilience - Nonbank and market concerns: - High leverage, liquidity and duration mismatches, and interconnectedness between non-bank financial institutions and banks pose additional risks. - Flows into money market funds have accelerated following regional bank failures; extended high interest rates may accelerate bank disintermediation. - Reallocation across intermediaries could encounter issues in market liquidity and functioning with unpredictable consequences. - Crypto-related entity failures underscore need for greater oversight, including consumer protection. - Nonbank intermediaries play important roles in commercial real estate via REITs and CMBS; commercial real estate has significant leverage, near-term financing needs, and is undergoing demand adjustments—this could spill over to nonbanks and banks. - Treasury market improvements underway: - Data on Treasury market operations is improving; work is underway to strengthen market functioning. - A standing repo facility has been established by the Fed to provide liquidity and contain upside spikes to short-term interest rates. - Work underway to establish a Treasury buyback program to support market liquidity (not to mitigate acute market stress). - Interagency working group on Treasury market resilience proposed measures including expansion of all-to-all trading and greater use of central clearing; rule change proposals have been circulated for public comment. - Recommendation: translate proposals into institutional changes to strengthen Treasury market functioning. - Increasing dealer capacity to intermediate the Treasury market by modifying the Supplementary Leverage Ratio may also help. *Source: Excerpt from content unit 1usaea2023001 (PDF chapter/section).* ### 51. Despite a significant reduction in residential construction and mortgage initiation, ### 1usaea2023001 - 51. Despite a significant reduction in residential construction and mortgage initiation, ### Housing and mortgage-sector financial stability - Despite a significant reduction in residential construction and mortgage initiation, financial stability risks from the ongoing housing downturn appear contained. - Mortgages have been issued based on generally strong underwriting standards. - The robust jobs market is likely to dampen delinquency rates, even as the economy slows. - "95 percent of mortgages are at fixed rates" which insulates homeowners from the ongoing rise in interest rates. - Virtually all homeowners have a sizable home equity buffer, implying a large decline in house prices would be required for mortgages to become underwater. - Some bank and nonbank mortgage providers will need to adapt their business models to cope with significant reductions in refinancing activity and new mortgage origination. ### Unaddressed FSAP recommendations - A range of FSAP recommendations remain unaddressed, including: - (i) ensuring each Financial Stability Oversight Council member has an explicit financial stability objective in their mandate; - (ii) closing a range of data gaps; - (iii) finalizing the arrangements for market-wide circuit breakers and providing greater budgetary autonomy for the SEC and CFTC; - (iv) reviewing prudential requirements for non-internationally active banks (category III and IV); - (v) strengthening the consistency of risk management practices by central counterparties; - (vi) subjecting mutual funds to SEC-led liquidity stress tests; and - (vii) developing a consolidated group capital requirement for insurance companies. ### Authorities’ views and recent interventions - The banking system has evolved in ways that could increase its exposure to deposit runs, including technology-related changes and the growing role of uninsured deposits as a source of deposit funding. - Recent failures of specific regional banks have highlighted some of these potential vulnerabilities. - The Federal Reserve, FDIC, and Treasury made swift and forceful interventions in the wake of these bank failures to strengthen confidence in the U.S. banking system and protect depositors. - Capital and liquidity positions of the overall banking system remain at strong levels and banks are well-positioned to absorb a range of shocks; nonetheless, there is no scope for complacency. - The Biden administration has prioritized rebuilding FSOC; work is underway to re-examine the supervisory and regulatory regime to address identified shortcomings. - The SEC has proposed rules to mitigate vulnerabilities in money market and open-end funds. - Substantial work continues to close data gaps in financial stability monitoring (including on the activities of hedge funds). - Steps have been proposed to ensure all markets, including the market for U.S. Treasuries, are able to function fully under stressful conditions. - The administration is vigilant in monitoring and addressing potential risks posed by digital assets and is working with Congress to establish a prudential regulatory framework for stablecoins. ### Governance, anti-corruption, and AML/CFT priorities - The U.S. continues efforts to safeguard the financial system from illicit proceeds of crime, especially from corruption. - The "2022 National Strategy for Combating Terrorist and Other Illicit Financing" outlines priorities including closing gaps in the AML/CFT framework, making the AML/CFT framework for financial institutions more effective, and enabling technological innovation while mitigating risks. - FinCEN is undertaking public consultations on proposed regulations for accessing beneficial ownership information in the registry established under the Corporate Transparency Act. - The Treasury’s "2022 Action Plan on digital assets" focuses on monitoring risks and strengthening AML/CFT supervision of digital asset activities. - The recently released "Risk Assessment of Decentralized Finance" highlighted vulnerabilities from lack of AML/CFT controls in that sector and identified further work to close gaps. - Work on confiscating assets in the U.S. related to foreign corruption and repatriating them to foreign countries is continuing. - Financial institutions were provided guidance on detecting proceeds of foreign public corruption through the "FinCEN 2022 Advisory on Kleptocracy." - Progressing on governance and transparency initiatives will strengthen tools to combat money laundering and corruption, including: - Creation of the registry of beneficial ownership information and associated rules on access and verification. - A law subjecting gatekeepers and enablers (especially lawyers, accountants, and trust and company service providers) to customer due diligence and suspicious transaction reporting obligations has yet to be approved. - Ensuring real estate agents are subject to comprehensive AML/CFT requirements (e.g., enhanced due diligence for politically exposed persons). - Renewal of FinCEN’s Geographic Targeting Orders (which expires in April 2023) to identify beneficial owners of non-financed purchases of residential real estate is a positive development. - Improving transparency in government procurement by ensuring public procurement authorities have timely access to beneficial ownership information of bidding companies. ### Staff appraisal — macroeconomic outlook and policy guidance - Resilience and outlook: - The U.S. economy has proven resilient to the significant tightening of both fiscal and monetary policy in 2022. - Consumer demand has held up, initially boosted by a drawdown of pent-up savings and more recently by solid growth in real disposable incomes. - Policy restraint is expected to continue to slow the economy in 2023 with a modest pick-up in momentum later in 2024. - "Unemployment is expected to rise slowly to 4½ percent by end-2024." - Inflation dynamics: - Resilient demand and strong labor market outcomes have contributed to more persistent inflation. - Goods inflation has moderated and shelter price growth is expected to start slowing in coming months. - Past nominal wage increases are feeding into non-shelter service prices. - Core and headline PCE inflation are expected to continue falling but will remain materially above the Federal Reserve’s medium-term target throughout 2023 and 2024. - Risks to the path for inflation are skewed upwards. - Monetary policy recommendation: - Bringing inflation back to target will require an extended period of tight monetary policy with "the federal funds rate remaining at 5¼—5½ percent until late in 2024." - If the economy proves less responsive to higher interest rates and/or inflation proves more persistent, the path for the federal funds rate will need to go higher. - The Federal Reserve should communicate carefully how it assesses incoming data and provide clear guidance on the expected path of the policy rate, emphasizing the need for interest rates to remain at high levels for an extended period while noting guidance is conditional on incoming data. - Fiscal policy: - The disinflation process should be supported by a tighter fiscal policy. - On a general government basis, fiscal policy is expected to be procyclical in 2023. - With the economy operating well above potential and inflation persistent, there is a strong case for greater fiscal restraint in 2023–24. - A tighter fiscal stance would lessen the burden on the Federal Reserve in disinflating the economy. - A more significant fiscal adjustment will be required over the medium-term to put public debt on a decidedly downward path, requiring a broad range of policies including both tax increases ("even for those earning less than US$400,000 per year") and addressing structural imbalances in social security and Medicare. - The debt ceiling should be immediately raised or suspended by Congress and a more permanent solution developed to avoid recurrent debt limit brinkmanship through institutional changes that ensure that, once appropriations are approved, the corresponding space on the debt ceiling is automatically provided to finance that spending. - Supply chains and industrial policy: - Concerns over resilience of supply chains have motivated provisions in the Inflation Reduction Act, the CHIPS Act, and the Build America, Buy America Act that favor goods and services produced in the U.S. or North America. - Experience shows protectionist provisions can distort trade and investment, risk fragmenting global supply chains, trigger retaliatory actions, and ultimately be bad for U.S. growth, productivity and labor market outcomes. - Banking supervision and prudential policy: - Recent bank failures highlight potential systemic risks posed by relatively small financial intermediaries, poor risk management, vulnerabilities from the 2018 regulatory tailoring, and inadequate supervisory oversight. - Questions arise about the assertiveness of bank supervisors and the effectiveness of stress tests that were meant to identify bank vulnerabilities and systemic contagion. - Prudential requirements should be made more stringent for mid-sized banks, subjecting them to similar requirements as larger banks, including the annual supervisory stress testing process and aligning their capital and liquidity requirements with the Basel framework. - Structural and social policies: - Policies proposed in the President’s budget could address supply side constraints to growth but should be implemented within a fiscal envelope that ensures a downward path for public debt. - Suggested measures include expanding the earned income tax credit, providing childcare subsidies, requiring paid family leave, expanding healthcare coverage, increasing access to pre-K and higher education, and continued infrastructure investment (including climate resilience). - Tax changes could raise revenue, make the system more progressive and equitable, and curtail base erosion and profit shifting. - Climate and decarbonization: - "Policies in the Inflation Reduction Act ... should lower greenhouse gas emissions by around 36 percent by 2030 (relative to 2005 levels)." - Rapid deployment of green energy will hinge on overcoming permitting and electricity transmission siting delays. - Additional measures needed to reach the U.S. objective of "a 50–52 percent decline" in emissions include tightening regulations, reauthorizing the Farm Bill with carbon priorities, and building social consensus to begin pricing carbon. - The U.S.’s very flexible labor markets will help facilitate decarbonization, but training and financial support for affected workers will ease reallocation and lower societal costs. - External position: - The "2022 external position remains moderately weaker than the level implied by medium-term fundamentals and desirable policies." - The current account is likely to remain below its medium-term norm for the foreseeable future. - The real exchange rate is "around 8 percent more appreciated than prior to the pandemic and appears to be moderately overvalued." *Content unit: 1usaea2023001* ### 66. It is recommended that the next Article IV consultation take place on the standard 12- ### 1usaea2023001 - 66. It is recommended that the next Article IV consultation take place on the standard 12- ### Recommendation on Article IV consultation - It is recommended that the next Article IV consultation take place on the standard 12-month cycle. ### Macroeconomic outlook and projections (selected highlights from Table 1 and Table 2) - Real GDP: 2.3 -2. 8 5.9 2.1 1.7 1.0 1.8 2.1 2.1 2.1 - Real GDP (q4/q4): 2.6 -1. 5 5.7 0.9 1.2 1.1 2.0 2.1 2.1 2.1 - Net exports (contribution to GDP) 1/: -0. 1 -0. 3 -1. 2 -0. 4 0.5 0.0 0.0 0.0 0.0 0.0 - Total domestic demand: 2.3 -2. 4 7.0 2.4 1.1 1.0 1.7 2.0 2.1 2.1 - Final domestic demand: 2.3 -1. 9 6.7 1.7 1.6 1.0 1.7 2.1 2.1 2.1 - Private final consumption: 2.0 -3. 0 8.3 2.7 2.0 0.8 1.4 1.7 2.0 2.0 - Unemployment rate: 3.7 8.1 5.4 3.6 3.7 4.2 4.3 4.0 4.0 4.0 - Labor force participation rate: 63.1 61.7 61.7 62.2 62.5 62.5 62.4 62.2 62.2 62.2 - Potential GDP: 1.6 0.4 1.8 2.2 2.1 2.0 2.0 2.0 2.0 2.0 - Output gap (% of potential GDP): 0.7 -2. 5 1.5 1.4 0.9 0.0 -0. 2 -0. 2 -0. 1 0.0 - CPI inflation (q4/q4): 2.0 1.2 6.8 7.1 3.6 2.5 2.4 2.1 2.1 2.2 - Core CPI inflation (q4/q4): 2.3 1.6 5.0 6.0 4.2 2.9 2.7 2.3 2.3 2.3 - PCE inflation (q4/q4): 1.4 1.1 5.7 5.7 3.8 2.6 2.3 1.9 1.9 2.0 - Core PCE inflation (q4/q4): 1.6 1.4 4.7 4.8 4.1 2.8 2.5 2.0 2.0 2.0 - Federal balance (% of GDP) 2/: -4. 7 -14.9 -12.3 -5. 5 -5. 6 -5. 7 -6. 4 -6. 2 -5. 9 -6. 4 - Federal debt held by the public (% of GDP): 79.4 99.8 98.4 97.0 96.6 98.4 101.2 103.6 105.8 108.3 - General government gross debt (% of GDP): 108.7 133.5 126.4 121.4 121.8 124.6 127.5 130.1 132.5 134.9 - Fed funds rate (period average): 2.2 0.4 0.1 1.7 5.1 5.3 4.2 3.2 2.4 2.4 - Ten-year government bond rate: 2.1 0.9 1.4 3.0 3.8 3.8 3.6 3.4 3.4 3.4 - Current account balance (% of GDP): -2. 1 -2. 9 -3. 6 -3. 7 -2. 8 -2. 5 -2. 4 -2. 3 -2. 2 -2. 2 - Net International Investment Position (% of GDP): -54.5 -69.8 -77.7 -63.3 -62.5 -62.6 -62.4 -62.2 -62.0 -61.7 - Current account balance (US$ billions, memorandum): -446 -620 -846 -944 -745 -714 -707 -701 -705 -724 Notes on tables: - Projections and historical series are shown for 2019–2028 in Tables 1–4, with fiscal projections extending to 2032 in Table 3. - Sources listed in the tables: BEA; BLS; FRB; Haver Analytics; IMF staff estimates; Congressional Budget Office; Office of Management and Budget; IMF Integrated Monetary Database and Standard Report Forms; Haver Analytics; FDIC. ### Balance of payments and trade (selected highlights from Table 2) - Real exports growth (goods and services): 0.5 -13.2 6.1 7.1 3.2 0.6 2.0 2.5 2.3 2.2 - Real imports growth (goods and services): 1.1 -9. 0 14.1 8.1 -1. 0 0.2 1.6 2.2 2.2 2.1 - Nominal exports (goods and services): 11.9 10.2 10.9 11.7 11.3 11.2 11.1 11.1 11.1 11.0 - Nominal imports (goods and services): 14.6 13.2 14.6 15.5 14.4 14.0 13.8 13.7 13.6 13.5 - Net exports (contribution to real GDP growth): -0. 1 -0. 3 -1. 2 -0. 4 0.5 0.0 0.0 0.0 0.0 0.0 ### Fiscal outlook and public finances (selected highlights from Table 3) - Federal government revenue (% of GDP): 16.4 16.2 17.9 19.6 18.4 17.9 17.4 17.8 18.1 18.2 18.2 18.2 18.2 18.1 - Federal government expenditure (% of GDP): 21.0 31.1 30.1 25.1 24.0 23.5 23.9 24.0 24.1 24.6 23.9 24.2 24.2 24.4 - Federal debt held by the public (% of GDP) (projection to 2032): 79.4 99.8 98.4 97.0 96.6 98.4 101.2 103.6 105.8 108.3 110.0 111.9 113.7 115.5 - General government gross debt (% of GDP) (projection to 2032): 108.7 133.5 126.4 121.4 121.8 124.6 127.5 130.1 132.5 134.9 136.8 138.7 140.5 142.4 - Gross debt including unfunded pension liabilities (% of potential GDP): 136.2 160.4 148.1 144.5 144.8 147.5 150.3 152.8 155.1 157.4 159.1 160.9 162.6 164.5 - Fiscal projections note: "Fiscal projections are based on Congressional Budget Office forecasts adjusted for the IMF staff’s policy and macroeconomic assumptions. Projections incorporate the effects of enacted legislation at the time of the publication of this table. Fiscal projections are adjusted to reflect the IMF staff’s forecasts for key macroeconomic and financial variables and different accounting treatment of defined-benefit pension plans and are converted to a general government basis." ### Financial sector indicators (selected highlights from Table 4 and Table 5) - Depository Corporations Survey (levels and growth series presented across 2019–2022; broad money and components shown) - Core Financial Soundness Indicators (eop, annual series through 2022): - Regulatory Capital to Risk-Weighted Assets: 14.5 14.4 14.4 14.1 14.2 14.5 14.8 14.7 16.3 16.4 15.5 - Regulatory Tier 1 Capital to Risk-Weighted Assets: 12.7 12.8 13.1 13.1 13.2 13.5 13.8 13.7 14.5 14.8 14.5 - Non-Performing Loans to Total Gross Loans: 3.3 2.5 1.9 1.5 1.3 1.1 0.9 0.9 1.1 0.8 0.7 - Return on Assets: 1.4 1.6 1.5 1.5 1.5 1.5 1.7 1.6 0.9 1.4 1.3 - Return on Equity: 9.3 10.2 9.4 9.7 9.6 9.0 12.2 11.5 7.3 11.6 11.5 ### Risk Assessment Matrix (selected risks, likelihood, expected impact, and policy responses) - Global Risks - Intensification of regional conflict(s). - Likelihood: High - Expected Impact: Medium. "Trade disruptions, tighter financial conditions and weaker consumer confidence weigh on domestic activity. Shortages in critical supply chain components further raise inflation." - Policy Response: "Make investments to increase resilience of financial intermediation and supply chain. Adjust the pace of planned monetary tightening according to the assessed downturn in activity." - Deepening geoeconomic fragmentation. - Likelihood: High - Expected Impact: Medium. "Distortions in investment decisions lower potential growth. Trading partners reduce external demand for U.S. exports. Domestic producers limit supply-chain networks, potentially increasing vulnerability to external shocks." - Policy Response: "Increase international competitiveness by investing in worker training and infrastructure. Engage with major trading partners to maintain open trade policies." - Abrupt global slowdown or recession. - Likelihood: Medium - Expected Impact: Medium. "Slower growth by trading partners reduces external demand for U.S. exports. Tighter financial conditions and weaker consumer confidence weigh on domestic activity." - Policy Response: "Recalibrate the pace of withdrawal of monetary support in event of significant impact on activity." - Commodity price volatility. - Likelihood: Medium - Expected Impact: Medium. "Rising commodity prices further reduce corporate profit margins, weaken household consumption, increase poverty, further raise inflation and inflation expectations from current elevated levels." - Policy Response: "Facilitate the expansion of domestic production of food and fuel. Increase the provision of food assistance to lower income households. Accelerate the transition to a low carbon economic model. Monetary policy responds assertively to any de-anchoring of inflation expectations." - Monetary policy miscalibration. - Likelihood: Medium - Expected Impact: High. "Continued high realized wage and price inflation, resulting from a sustained mismatch in supply and demand, proves persistent and causes a de-anchoring of inflation expectations." - Policy Response: "Clearly signal that the ex-ante real rate will need to go above neutral, and remain there for some time. Improve the Federal Reserve’s communications toolkit." - Cyberthreats. - Likelihood: Medium - Expected Impact: High. "Disruption is widespread including to the supply of essential goods, payments systems, and financial market infrastructure." - Policy Response: "Further build resilience in physical and digital infrastructure using the full range of fiscal and regulatory tools." - Domestic Risks - More abrupt tightening of financial conditions from stickier-than-expected inflation. - Likelihood: Medium - Expected Impact: High. "Abruptly tighter financing conditions could cause stress in leveraged corporates, financial institutions, and treasury markets." - Policy Response: "Tighter financial conditions will be necessary for the monetary transmission but if market functioning is compromised then targeted measures (such as providing liquidity in specific markets) could be considered." - Systemic financial instability, including deposit outflows in regional banks spreading to overall system. - Likelihood: Medium - Expected Impact: High. "Broader financial instability will weaken confidence and create uncertainty in monetary policy responses to inflation. Lower credit availability may constrain investment and employment growth, slowing activity." - Policy Response: "Strengthen prudential framework. Provide adequate and timely emergency lending to shore up banks. Ensure functioning of key markets, but targeted measures (such as providing liquidity in certain markets) can be provided to address periods of financial instability. Provide clear communication of monetary policy responses." - Persistently slow recovery in labor force participation. - Likelihood: Medium - Expected Impact: High. "Wage growth would continue to rise, putting pressure on corporate margins, and potentially further fueling inflation. Also, supply constraints would slow activity." - Policy Response: "Tighter monetary policy should help rebalance supply and demand in labor markets. Supply side policies (such as paid family leave, childcare, EITC, immigration reform) would help boost labor supply." ### Sovereign Risk and Debt Sustainability Assessment (summary) - Background and recent fiscal history: - "An unprecedented scale of fiscal expansion was introduced in response to the COVID-19 pandemic increasing the fiscal deficit by over 8 percent of GDP." - Subsequent large fiscal consolidations occurred in 2021–22 as pandemic-related extraordinary measures unwound. - The American Rescue Plan (passed in March 2021) slowed the pace of fiscal contraction in 2021–22 but did not forestall it. - The Infrastructure Investment and Jobs Act (passed in November 2021) is estimated to provide little upfront fiscal impulse. - Baseline outlook and key projections: - "Under this baseline, public debt is expected to rise over the medium term as age-related spending pressures on entitlement programs assert themselves." - Federal debt held by the public is projected to increase "from about 97 percent of GDP in FY2022 to around 116 percent of GDP by 2032." - General government gross debt is projected to rise "from about 121 percent of GDP to 142 percent of GDP over the same period." - Assessment and policy implication: - "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." - "Nonetheless, the risks of debt distress are low, and debt is viewed as sustainable." *Source: UNITED STATES INTERNATIONAL MONETARY FUND.* ### 3. Adjustment scenario. The general government ### 3. Adjustment scenario. The general government ### Fiscal adjustment targets and near-term path - General government primary deficit was 1.3 percent of GDP in 2022 and is projected at 4.1 percent of GDP in 2023. - Staff baseline: gradually raise the primary general government surplus over the medium-term to around 1 percent of GDP. - Federal government target: 1.5 percent of GDP primary surplus. - Note: "The target primary surplus would have to be larger to bring the debt ratio closer to pre-Great Recession levels." ### Debt servicing costs and interest–growth dynamics - Effective nominal interest rate is projected to rise gradually from the projected level of 2.5 percent in 2023 to 2.9 percent by 2032. - Real interest rates are expected to continue to act as a debt-reducing flow over the medium-term, benefiting debt projections through a favorable interest rate–growth differential. ### Long-term risks: health expenditures and demographics - CBO projection (reflected in staff baseline): spending on major health care programs to rise from 5.8 percent of GDP in 2022 to 8.4 percent of GDP by 2053. - Rising healthcare expenditures are identified as considerably increasing deficit and sovereign stress risk in the long term. - Policy/efficiency measures suggested to contain health care cost: - Increasing efficiency. - Greater cost sharing with beneficiaries. - Changing the mechanism of remunerating healthcare providers. ### Realism of projections - Baseline economic assumptions are "generally within the error band observed for all countries." - Baseline fiscal projections and implied near-term adjustment are described as realistic and "well within the median range of adjustment in historical and cross-country experience." ### Mitigating factors and financing environment - The depth and liquidity of the U.S. Treasury market, and the safe-haven status of the United States, are cited as mitigating factors for high external and gross financing requirements. ### Selected baseline numeric highlights (from staff projections) - Public debt (percent of GDP): 121.7 (Actual 2022); projected 121.8 (2023), 124.6 (2024), 127.5 (2025), 130.1 (2026), 132.5 (2027), 134.8 (2028), 137.1 (2029), 139.7 (2030), 142.3 (2031), 144.9 (2032). - Change in public debt (percent of GDP): -4.8 (2022 actual), 0.1 (2023), 2.9 (2024), 2.8 (2025), 2.6 (2026), 2.4 (2027), 2.3 (2028), 2.3 (2029), 2.6 (2030), 2.5 (2031), 2.6 (2032). - Primary deficit (percent of GDP): 1.3 (2022 actual), 4.1 (2023), 4.0 (2024), 4.1 (2025), 3.7 (2026), 3.4 (2027), 3.4 (2028), 3.1 (2029), 3.4 (2030), 3.5 (2031), 3.6 (2032). - Noninterest revenues (percent of GDP): 32.1 (2022), 31.3 (2023), 30.9 (2024), 30.7 (2025), 31.0 (2026), 31.3 (2027), 31.4 (2028), 31.5 (2029), 31.6 (2030), 31.7 (2031), 31.8 (2032). - Noninterest expenditures (percent of GDP): 33.4 (2022), 35.4 (2023), 34.9 (2024), 34.8 (2025), 34.8 (2026), 34.7 (2027), 34.8 (2028), 34.6 (2029), 35.0 (2030), 35.2 (2031), 35.5 (2032). - Automatic debt dynamics (percent of GDP): -10.7 (2022), -4.0 (2023), -1.1 (2024), -1.3 (2025), -1.1 (2026), -1.0 (2027), -1.2 (2028), -0.7 (2029), -0.8 (2030), -0.9 (2031), -1.0 (2032). - Real GDP growth (percent): 2.1 (2022), 1.7 (2023), 1.0 (2024), 1.8 (2025), 2.1 (2026), 2.1 (2027), 2.1 (2028), 1.7 (2029), 1.7 (2030), 1.7 (2031), 1.7 (2032). - Inflation (GDP deflator; percent): 7.0 (2022), 4.3 (2023), 3.0 (2024), 2.5 (2025), 2.1 (2026), 1.9 (2027), 1.9 (2028), 1.9 (2029), 1.9 (2030), 1.9 (2031), 1.9 (2032). - Nominal GDP growth (percent): 9.2 (2022), 6.0 (2023), 4.1 (2024), 4.3 (2025), 4.2 (2026), 4.1 (2027), 4.1 (2028), 3.7 (2029), 3.7 (2030), 3.7 (2031), 3.7 (2032). - Effective interest rate (percent): 0.0 (2022), 2.5 (2023), 3.1 (2024), 3.2 (2025), 3.3 (2026), 3.3 (2027), 3.2 (2028), 3.1 (2029), 3.0 (2030), 3.0 (2031), 2.9 (2032). - Gross financing needs (percent of GDP): 36.9 (2022), 36.9 (2023), 34.3 (2024), 32.3 (2025), 31.3 (2026), 31.7 (2027), 31.8 (2028), 31.6 (2029), 31.5 (2030), 32.8 (2031), 33.0 (2032). - Debt service (percent of GDP): 36.1 (2022), 33.4 (2023), 31.1 (2024), 28.8 (2025), 28.2 (2026), 28.9 (2027), 29.0 (2028), 29.1 (2029), 28.7 (2030), 29.9 (2031), 30.0 (2032). *Source: 1usaea2023001 - 3. Adjustment scenario. The general government (IMF staff).* ### Appendix IV. Progress on Past Policy Recommendations ### Appendix IV. Progress on Past Policy Recommendations ### 2022 Article IV: Key Policy Recommendations and Actions Taken - Monetary policy - Recommendation: Raising the policy rate to around 4 percent by end-2022. - Action taken: Policy rates were increased rapidly to 4¼ percent at end-2022 and to 5 percent by May 2023. - Fed communication - Recommendation: Publish an internally consistent economic projection and rate path along with quantified alternate scenarios. - Action taken: Policymakers continue to rely on the summary of economic projections to convey forward guidance. - Improve Treasury market functioning - Recommendation: Central clearing, modifying the supplementary leverage ratio, liquidity stress tests for asset managers, lock-in provisions for funds, swing pricing, gates, and/or allowing in-kind redemptions. - Action taken: November 2022 Progress Report by the Interagency Working Group for Treasury Market Surveillance examined similar policy options. Possible changes remain under consideration. - Supply-side reforms - Recommendation: Childcare subsidies, paid family leave, removing cliffs in social benefits, increasing access to healthcare, education and vocational training, immigration reform. - Action taken: Health insurance premium subsidies were renewed. Little progress in other areas (although the president’s budget proposes similar policies). - Tax reform - Recommendation: Higher corporate tax, removing loopholes (e.g., carried interest and step-up basis), reducing estate tax minimum, global agreement on minimum tax. - Action taken: No progress (although the president’s budget proposes similar policies). - Improve safety net - Recommendation: Expand SNAP, improve TANF and Medicaid, make the refundable child tax credit permanent, and expand the EITC. - Action taken: No progress. - Fiscal consolidation / debt-GDP - Recommendation: Putting debt-GDP on a downward path through a 1 percent of GDP general government primary surplus (a 4 percent of GDP medium term adjustment in the primary). - Action taken: Over the medium term, general government primary deficit now expected to be ½-¾ percent of GDP higher. President’s budget proposes 1.8 percent of GDP reduction in federal primary deficit. - Trade openness - Recommendation: Roll back tariffs and other trade distortions introduced over the past 5 years, avoid steps to fragment global system, restore functioning dispute settlement at WTO. - Action taken: No progress. Domestic content requirements in various laws represent a step back. - Climate action - Recommendation: Pricing of carbon, regulatory restraint, feebates, eliminating subsidies for fossil fuels and carbon-intensive agriculture, reprioritize spending to mitigation and adaptation goals. - Action taken: Inflation Reduction Act provides US$391 billion for emissions reduction, transition and adaptation. No pricing of carbon proposed. ### FSAP (2020) Recommendations — Systemic Risk Oversight and Macroprudential Framework - Provide an explicit financial stability mandate to all federal FSOC members - Responsible: Congress - Developments: This legislative recommendation has not been implemented. - Prioritize development of macroprudential tools for nonbank sector - Responsible: FSOC - Developments: FSOC made it a priority in 2021 to evaluate risks from hedge funds, open-end funds, and money market funds; supports ongoing efforts by member agencies. On April 21, 2023, the Council issued two proposals for public comment: a proposed analytic framework and proposed interpretive guidance for nonbanks designation process to enhance transparency and ability to address financial stability risk. - Close data gaps (CLOs, repo markets) - Responsible: OFR - Developments: February 2019 rule (12 CFR Part 1610) on ongoing data collection of centrally cleared transactions in the U.S. repurchase agreement market; data collection began October 2019. September 2020 Short-Term Funding Monitor launched integrating centrally cleared repo and triparty repo data; users can download via public API. ### FSAP — Banking Regulation and Supervision - Review prudential requirements for non-internationally active banks and consider extending LCR - Responsible: FRB, FDIC, OCC - Developments: Federal Reserve, FDIC, and OCC are evaluating capital and liquidity requirements for these institutions (noted in reviews of Silicon Valley Bank and Signature Bank). - Streamline regulatory requirements; consider rewriting guidance as regulation - Responsible: FRB, FDIC, OCC - Developments: Board, FDIC, and OCC working on a revised framework to produce more robust and internationally consistent capital requirements for the largest firms; staff continue to revise or make inactive outdated guidance and publish legal interpretations. - Heightened governance standards for large/complex BHCs; concentration risk; interest rate risk management - Responsible: FRB, FDIC, OCC - Developments: Board introduced “Supervisory Guidance on Board of Directors’ Effectiveness” for BHCs with total consolidated assets of $100 billion or more. FRB and peers evaluating supervision and regulation of interest rate risk management. ### FSAP — Insurance Regulation and Supervision - Increase independence of state insurance regulators - Responsible: States (NAIC) - Developments: Not implemented; NAIC forwarded recommendation to NCOIL, NCSL and Legislative Liaisons Bulletin Board; method of commissioner selection determined by state legislatures. - Move all in-force life insurance business to principles-based reserving (PBR) after five-year transition; adjust asset valuation; recalibrate RBC - Responsible: NAIC - Developments: PBR would require significant effort; PBR currently applies only to new business for specified reasons including conservatism of formulaic reserves and state law constraints. - Develop consolidated group capital requirement comparable to ICS - Responsible: NAIC and FRB - Developments: Board and NAIC developing aggregation approaches; U.S. participating in IAIS Aggregation Method development. No U.S. regulator intends to adopt ICS in its current form. ### FSAP — Regulation, Supervision, and Oversight of FMIs - Increase CFTC resources for CCP supervision; strengthen rule-approval to affirmative approval with public consultation - Responsible: CFTC - Developments: Congress approved additional resources to the CFTC on December 28, 2020; March 15, 2022; and December 29, 2022. - Collaborate on CCP risk management consistency - Responsible: FRB, SEC, CFTC - Developments: Implemented regulatory frameworks consistent with the PFMI as mandated by Title VIII of the Dodd-Frank Act; authorities coordinate exams and reviews of CCP risk management practices. - Develop and execute systemwide CCP supervisory stress tests - Responsible: FRB, CFTC, SEC - Developments: Preparatory work began in 2019; delayed by COVID-19 and geopolitical events; engagement will resume. Authorities addressed aggregate effects of COVID volatility; CFTC co-chairs international group on margin demand effects; consultative report late 2021 and final report near end-2022. ### FSAP — Securities Regulation and Supervision - Greater independence for CFTC and SEC to determine resources - Responsible: Congress - Developments: Legislative recommendation has not been implemented. - Assess risks related to mutual funds and stable NAV MMFs; SEC-led liquidity stress testing - Responsible: SEC - Developments: - May 3, 2023: SEC adopted amendments to Form PF requiring current reporting by large hedge fund advisers regarding certain events, quarterly event reporting for private equity fund advisers, and enhanced reporting by large private equity advisers. - August 10, 2022: CFTC and SEC jointly proposed to amend Form PF to enhance reporting by large hedge fund advisers and basic information about advisers and private funds. - November 2, 2022: SEC proposed enhancements to open-end fund liquidity framework (Open-End Fund Liquidity Risk Management and Swing Pricing; Form N-PORT). - December 15, 2021: SEC proposed amendments to improve resilience and transparency of money market funds. - Finalize broker-dealer capital rules, market-wide circuit breakers, and delivery of Consolidated Audit Trail (CAT) - Responsible: SEC - Developments: - June 21, 2019: SEC adopted final broker-dealer capital and segregation rules; compliance date October 6, 2021. - MWCBs triggered four times in March 2020; SROs’ MWCB rules made permanent in March and April 2022 without modification; additional testing and reporting requirements added. - SEC charged SROs with developing and building CAT; CAT Implementation Plan filed July 22, 2020; quarterly progress reports available from CAT plan. - Increase scrutiny of new registrants; reduce reliance on self-attestations - Responsible: SEC, CFTC, NFA - Developments: SEC Division of Examinations considers newly registered status in risk selection; March 27, 2023 Risk Alert on examinations of newly-registered investment advisers. Newly CFTC-registered CPOs immediately eligible for NFA examination; factors may prompt exam scheduling. ### FSAP — AML/CFT - Collect beneficial ownership information on formation and maintain timely access - Responsible: Congress - Developments: AML Act of 2020 (Corporate Transparency Act) enacted on January 1, 2021; requires reporting companies to disclose beneficial owners on formation and when beneficial owners change. - Ensure effective regulation and supervision of investment advisers, lawyers, accountants, and company service providers for AML/CFT - Responsible: Treasury (TFFC) - Developments: FATF assessed U.S. progress in Third Follow-Up to U.S. Mutual Evaluation; U.S. will continue engagement with FATF to address gaps identified. ### FSAP — Systemic Liquidity and Crisis Preparedness - Promote fungibility of Treasury Securities and Reserves by adjusting Discount Window assumptions in liquidity metrics - Responsible: FRB (S&R with MA) - Developments: No changes made since FSAP. - Continue regular fine-tuning OMOs - Responsible: FRB - Developments: In current operating environment with reserves in excess of $3 trillion, no fine-tuning or reserve management OMOs are needed. - Advance arrangements for providing liquidity to systemic nonbanks and CCPs; reconsider restrictions on bilateral ELA to designated systemically important nonbanks - Responsible: FRB, Treasury - Developments: Federal Reserve can provide liquidity to systemic nonbanks via broad-based Section 13(3) facilities; for FSOC-designated systemically important CCPs, Fed authorized to provide bilateral liquidity in unusual or exigent circumstances; reconsideration of restrictions on bilateral ELA to systemic nonbanks would require Congressional action. - Develop robust backup plans if Bank of New York Mellon (BNYM) cannot settle/clear repo transactions - Responsible: FRB (S&R with NY and RBOPS) - Developments: Federal Reserve continues to engage market participants on developing and implementing robust backup plans; industry interest and support persist. - Enhance arrangements to provide foreign currency liquidity to banks and designated systemically important CCPs - Responsible: FRB - Developments: No changes since FSAP. - Crisis preparedness and resolution planning - Responsible: FSOC, FRB, FDIC, OCC (S&R/FBAs) - Developments: FSOC promotes information sharing and collaboration; agencies continue to use discretion to subject wider array of firms to RRP through revised resolution plan rules; OCC reviewing all bank Recovery plans; FBAs continue to review RRPs with increased focus on testing resiliency, recoverability, and resolvability; FDIC undertaking institution-specific strategic planning for orderly liquidation authorities for largest G-SIBs; FDIC and Board co-chair annual Crisis Management Group meetings for U.S. G-SIBs. - Extend OLA powers to FBOs’ U.S. branches; equal depositor preference; legal effect to foreign resolution measures - Responsible: Congress - Developments: Legislative recommendation has not been implemented. ### Selected Fund Relations and Statistical Notes (factual figures) - Membership status: Joined: December 27, 1945; Article VIII. - General Resources Account - Quota: 82,994.20 SDR Million (100.00 percent of Quota) - IMF's Holdings of Currency (Holdings Rate): 57,526.59 SDR Million (69.31 percent of Quota) - Reserve Tranche Position: 25,482.8 SDR Million (30.70 percent of Quota) - New Arrangements to Borrow: 176.22 SDR Million - SDR Department - Net cumulative allocation: 114,861.89 SDR Million (100.00 percent of Allocation) - Holdings: 121,346.54 SDR Million (105.65 percent of Allocation) - Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs) - Charges/Interest: 1.51 (2023), 1.51 (2024), 1.51 (2025), 1.51 (2026), 1.51 (2027) - 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, maintains an exchange system free of multiple currency practices and restrictions on current international transactions except for measures imposed for security reasons. Last notification of security measures was made on May 08, 2023. - Article IV Consultation: 2023 consultation concluded on June 12, 2023; 2023 Article IV discussions took place during May 1–22, 2023. Concluding meetings with Chair Powell and Treasury Secretary Yellen occurred on May 26. Team led by Nigel Chalk with named team members; publication subject to authorities’ non-objection. *Source: Appendix IV. Progress on Past Policy Recommendations (Staff Report materials provided).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1usaea2023001.pdf_