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### BACKDROP: A TEPID RECOVERY AMID STRAINED MACROECONOMIC POLICIES
- The U.S. economy "continues to recover at a modest pace" and the recovery "has in fact been somewhat stronger than in a number of other major advanced economies."
- Unemployment "increased more sharply than in all other major advanced economies during the recession and remains high."
- Staff estimates the output gap "at around 4 percent in 2011."
- Core inflation "weakened to multi-decade lows in late 2010" but "has started to firm" and "remains contained given elevated resource slack."
- Monetary policy: "near-zero policy rates" and a "Fed balance sheet more than three times larger than at the start of the economic crisis."
- Main policy challenge: "strike the right balance between exiting from extraordinary support and sustaining the recovery."

### THE ANATOMY OF THE SLOW RECOVERY
- Recovery constraints and transmission
  - "Significant adverse feedback loops between housing, consumption, and employment."
  - Housing and labor markets: "the weakest links."
  - Financial conditions improved "particularly for large firms" but "remain tight especially for small firms and real estate."
  - "Exports and the performance of businesses and the financial sector have improved significantly."
- Housing and household balance sheets
  - Vacant residential units estimated "around 3 million."
  - House price projections: "Many analysts expect price declines of 3½ percent in 2011 on a fourth-quarter over fourth-quarter basis (with staff slightly more pessimistic)."
  - Residential fixed investment has been "a drag on output and employment."
  - Household leverage:
    - Household debt peaked at "133 percent of disposable income at the end of 2007."
    - Household debt declined to "119 percent as of the first quarter of 2011."
    - Pre-bubble average household debt about "90 percent of disposable income."
  - Household assets and consumption sensitivities:
    - Net worth improved "from about 455 to 500 percent of disposable income between the second quarter of 2009 and the first quarter of 2011."
    - "A 10 percent house price appreciation is estimated to raise consumption by 1.5 percent over the medium term."
    - Marginal propensities: real estate "9 cents per one dollar" and net financial wealth "4 cents per one dollar."
- Labor markets
  - Unemployment "peaked at 10.1 percent in October 2009" and "has fluctuated around 9 percent in 2011."
  - As of May 2011, "aggregate employment was 6.6 million below the pre-crisis peak."
  - "More than 40 percent of the unemployed have been out of work for six months or more—a record level of long-term unemployment for the United States."
  - Labor force participation "fell significantly since the crisis"; employment-to-population ratio "lowest level in more than 25 years."
  - Sectoral mismatches (notably construction) and weak housing markets may have "put upward pressure on structural unemployment."
- Financial sector healing and securitization
  - "Liquidity is abundant thanks to near-zero policy rates and unconventional easing."
  - "Stock prices are about 15 percent above their August 2010 level."
  - Lending standards tight "especially for residential mortgages, small enterprises, and commercial real estate."
  - Commercial banks "are highly capitalized" but asset quality has "improved slowly"; coverage ratio and ratio of risk-weighted assets to total assets "are both low."
  - Securitization remains well below pre-crisis levels; "private issuance of RMBS is still basically nil" while agency MBS issuance "has remained strong."
  - Policy, regulatory, and market factors reducing securitization incentives include Dodd-Frank retention rules, proposed cash reserve accounts for premium sale proceeds, historically-low funding rates, new accounting rules, demise of resecuritization vehicles, higher Basel III risk weights, and investor preference for simpler products.

### OUTLOOK AND RISKS
- Growth and composition
  - Staff expects GDP growth "between 2¾ percent and 3 percent from 2012 onwards."
  - Recovery characterized by a slowly narrowing output gap.
  - Drivers: household balance-sheet repair, sluggish aggregate labor income growth, projected medium-term fiscal adjustment, robust private investment in equipment and software, weak construction activity near term.
  - Current account deficit projected to remain around "3 percent of GDP over the medium term."
- Inflation and labor market
  - Twelve-month core consumer price inflation: "1.5 percent in May 2011, after declining to 0.6 percent at the end of 2010."
  - Twelve-month headline consumer price inflation: "3.5 percent in May 2011."
  - Elevated resource slack and stable longer-term inflation expectations expected to keep core inflation tame near term.
- Downside risks
  - Renewed housing market weakness and larger-than-expected house price declines; shadow inventory estimated "around 6 million units."
  - Unfavorable fiscal outcomes: sudden interest rate increases and/or sovereign downgrade risks if consolidation fails or debt ceiling is not raised.
  - Further commodity price shocks.
  - Credit supply constraints from weak securitization markets and tight loan standards.
  - Spillovers from European sovereign and bank debt market instability.
- Upside possibilities
  - Stronger-than-expected confidence improvements, pent-up demand for consumer durables, or faster hiring given healthy corporate balance sheets.

### FISCAL POLICY: PACE, COMPOSITION, AND MEDIUM-TERM CHALLENGES
- Authorities’ intentions and staff view
  - Authorities envisage a frontloaded withdrawal; President’s February budget would cut the federal deficit to "4.6 percent of GDP in FY2013."
  - Staff recommended a broadly uniform reduction of the federal structural primary deficit over the next five years (Staff Adjustment Scenario).
  - Staff’s recommended FY2013 deficit target: "around 6 percent of GDP."
  - Under the staff’s adjustment scenario, cumulative structural primary deficit reduction of "7½ percentage points of GDP (about 1½ p.p. per year)" would stabilize the debt ratio by mid-decade and then reduce it.
  - The President’s February budget falls short by "2½ percent of GDP."
- Short-run effects and multipliers
  - Staff projects expiration of temporary stimulus, lower defense spending and new deficit reduction measures will reduce the federal deficit by "3¾ percent of GDP over the next two fiscal years," subtracting roughly "1 percentage point from GDP growth in both 2012 and 2013."
  - Multipliers:
    - Expiration of targeted spending measures: "between 0.75–1."
    - Expiring tax provisions: "between 0–0.6."
    - October 2010 WEO average short-run multiplier: "around ½."
    - Consolidation relying on cuts in transfers and government consumption: "around ¼."
    - Public investment multipliers: "above ½."
    - Indirect tax hikes: "more than one-for-one fall in output."
  - Staff baseline assumes some stimulus extensions; projects a FY2013 deficit of "5½ percent of GDP" assuming payroll tax cut and emergency unemployment benefits renewed.
- Medium-term fiscal adjustment options
  - Entitlement changes (Social Security reform, trimming future benefits for upper-income retirees).
  - Additional savings in health care and mandatory spending (greater cost sharing, curbs to tax exemption for employer-provided health care).
  - Gradual reduction of tax expenditures (noting tax expenditures amount to "7 percent of GDP").
  - Consideration of a national VAT or sales tax and carbon taxes in the longer term.
- Institutional enhancements
  - Debt "failsafe" mechanism and multi-year expenditure envelope for non-security discretionary spending.
  - Staff cautioned against overemphasizing failsafe mechanisms; recommended specific measures and formal Congressional endorsement of medium-term objectives.
  - Staff suggested preparing budgets using conservative economic assumptions and incorporating outside forecasters.

### MONETARY POLICY: CONTINUED ACCOMMODATION AND NORMALIZATION STRATEGY
- Current stance and rationale
  - Monetary policy provided support through near-zero policy rates, clear guidance for extended accommodation, and large-scale asset purchases.
  - Well-anchored inflation expectations and significant resource underutilization imply "extraordinarily low level of short-term interest rates will likely remain appropriate for quite some time."
- Normalization steps discussed
  - Ending reinvestment of principal of maturing securities as a first step.
  - Short-term policy interest rates to serve as the main active tool.
  - Reducing excess reserves via ceasing reinvestments and reserve-draining operations (repos and term deposits).
  - A clearly communicated and gradual path of asset sales as an additional exit step.
- Communication and spillovers
  - Clear communication emphasized to avoid abrupt reversals of inflows to emerging markets and sharp jumps in Treasury yields.
  - Regular press briefings to present FOMC economic projections welcomed.

### FINANCIAL POLICY, REGULATORY REFORM, AND SUSTAINING CREDIT SUPPLY
- Financial sector health
  - Government investments being repaid; banks paid a net "$12 billion so far."
  - Banks’ tier 1 risk-based capital ratios: "13 percent" and leverage ratio: "9.1 percent at the end of 2011Q1."
  - Tier 1 common capital ratio for SCAP institutions: "9.8 percent."
  - Liquidity indicators improved; profits recovering largely due to reduced provisioning; return on assets weaker than pre-crisis.
- Remaining vulnerabilities
  - Exposure to European institutions and potential spillovers to U.S. money market funds.
  - Risk that debt limit-related stress could disrupt global financial stability.
- Regulatory reform and FSAP follow-up
  - Dodd-Frank Act enacted July 2010; "32 of the 33 key FSAP recommendations had been completed or were being implemented" per authorities.
  - Staff concern: regulatory fragmentation remains a key unaddressed recommendation.
  - FSAP implementation metrics (as of June 1, 2011):
    - "24 of the 87 studies required by DFA had been completed."
    - Of "385 DFA statutory deadlines for rulemaking": rules finalized in "24" instances, proposed in "115", "28" deadlines missed, "218" forthcoming.
    - FSOC had held "five meetings" and issued "three Notices of Proposed Rulemaking."
    - No SIFIs designated yet.
- Three key areas urged by the team
  - Prompt designation and tougher standards for systemically important financial institutions (SIFIs); resolution plans ("living wills"); use DFA powers to preemptively streamline firms too complex to resolve.
  - Address migration of risks to "shadow banking": rules and supervision to avoid reemergence; measures for money market funds and nonbank liquidity management.
  - Strengthen disclosure, risk retention, rating agency roles to revive securitization.

### HOUSING MARKETS: POLICY OPTIONS TO EASE ADJUSTMENT AND MITIGATE DISTRESS
- Risks and constraints
  - Housing expected to stabilize over next couple of years but risk of undershooting given shadow inventory and distress sales.
  - Administrative complexity and conflicting incentives have hindered efficient loan modifications.
  - Distress sales identified as main driver of recent price declines; excluding distress sales, prices had stopped falling.
- Staff recommendations
  - Allow mortgages to be modified in courts ("cramdowns") to create incentives for voluntary modifications—authorities noted limited political support in 2009.
  - Expand state programs assisting unemployed homeowners; parametric changes to programs (lower back-end debt-to-income ratios; bring LTV below 100 percent in programs like HAMP-PRA).
  - Attach clauses to modifications to share future home price appreciation gains.
  - Encourage GSEs to participate in principal write-downs; FHFA estimates "600,000–800,000" underwater and in default out of "30 million" guaranteed mortgages (worth "US$5 trillion").
  - Provide additional incentives for deed in lieu and short sales.
- Administration housing program outcomes (selected as of end-March 2011)
  - TARP housing support disbursed: "$1.4 billion out of the $45.6 billion allocated."
  - HAMP: "670,000 permanent modifications completed out of the 1.6 million modifications started"; "2,174 permanent modifications completed on FHA-insured loans through FHA-HAMP."
  - Second Lien Modification Program: "21,230 modifications completed."
  - Home Affordable Foreclosure Alternatives Program: "5,250 short sales or deeds in lieu completed."
  - Home Affordable Unemployment Program: "7,400 participants."
  - Hardest Hit Fund: "committed $7.6 billion; only $165 million spent."
  - FHA Short-Refinance Program ($8-billion): "refinanced 107 loans through end-March."
  - Fed and Treasury purchased "more than $1.4 trillion in agency mortgage-backed securities."

### LABOR MARKET POLICIES: REDUCING UNEMPLOYMENT AND IMPROVING MATCHING
- Program structure and funding
  - Nearly "50 different programs dispersed across nine federal departments" with cumulative budget of "0.1 percent of GDP."
  - Many programs transfer funds to states; state programs also significant.
- Staff proposals and institutional suggestions
  - Assess consolidation of programs with better funding for effectiveness.
  - Re-evaluate active labor market programs; use community colleges for retraining aligned to local employer demand.
  - Consider short-time compensation program features (as in Germany and Canada) to reduce cyclical employment burden.
  - Consider extending unemployment insurance and payroll tax cuts in 2012 or enacting targeted measures to induce hiring of long-term unemployed.

### STAFF APPRAISAL, RECOMMENDATIONS, AND PRIORITIES
- Overall appraisal
  - Policies must "balance exiting extraordinary support and sustaining the recovery amid renewed headwinds"; fiscal consolidation needed as debt dynamics unsustainable.
  - Key fiscal priority: stabilize the debt ratio by mid-decade and gradually reduce it afterwards.
- Recommended fiscal strategy
  - Reduce the federal structural primary deficit at a broadly uniform pace over the next five years within a fully-specified, politically-backed consolidation framework.
  - Fiscal adjustment should start in "FY2012."
  - Measures should include cuts in mandatory spending (including entitlement reforms) and revenue increases (including reducing tax expenditures); consideration of national VAT/sales tax and carbon taxes in the longer term.
  - Fiscal framework: Congressional endorsement of medium-term objectives; multi-year expenditure caps on non-security discretionary spending; a robust "failsafe" mechanism; conservative economic assumptions in budgets.
- Monetary policy and exit guidance
  - "Subdued inflation and significant resource underutilization" justify continued accommodation for some time.
  - Fed should remain vigilant to unmooring of long-term inflation expectations and respond decisively if risks materialize.
  - Gradual unwinding of Fed balance sheet via passive reinvestment cessation, reserve-draining operations, and clearly communicated asset sales when appropriate.
- Housing and labor support within fiscal constraints
  - Consider "cramdowns," strengthen federal mortgage modification programs, expand state homeowner assistance, encourage GSE principal write-down participation.
  - Re-examine active labor market programs and leverage education system and community colleges for retraining; consider tax incentives to spur hiring of long-term unemployed.
- Financial sector priorities
  - Promptly identify and impose heightened standards on systemic institutions (including nonbank SIFIs); improve resolvability and living wills; address shadow banking and money market fund vulnerabilities; continue strengthening disclosure and risk retention to revive securitization.
  - Allocate appropriate budgetary resources to fund supervisory and regulatory improvements and resist dilution of reforms.
- Multilateral role
  - U.S. should raise domestic saving via fiscal consolidation and strengthen financial sector regulation and supervision as key contributions to global stability; continue leadership in international coordination.

### SELECTED KEY STATISTICS AND PROJECTIONS (excerpts from tables and projections)
- GDP growth and related
  - Real GDP: "2011: 2.5"; "2012: 2.7"; "2013: 2.7"; medium-term staff expectation "between 2¾ percent and 3 percent from 2012 onwards."
  - Potential GDP: "2011: 1.6"; "2012: 1.8"; "2013: 2.0."
  - Output gap (percent of potential GDP): "2011: -3.9"; "2012: -3.1"; "2013: -2.5"; trend to "2016: -0.5."
- Labor market and inflation
  - Unemployment rate: "2011: 8.9"; "2012: 8.4"; "2013: 7.7"; "2016: 5.6."
  - Consumer price inflation (CPI): "2011: 2.8"; "2012: 1.6"; "2013: 1.5."
  - Twelve-month core CPI: "1.5 percent in May 2011"; headline CPI "3.5 percent in May 2011."
- Public finances
  - Federal balance (percent of GDP, fiscal years): "2011: -9.3"; staff recommended FY2013 target around "6 percent of GDP" versus administration "4.6 percent of GDP in FY2013" in President’s February budget.
  - Debt held by the public (percent of GDP): "2011: 70.2"; projected rising to "85.0 by 2016" in table excerpts.
  - General government gross debt (percent of GDP): "2011: 99.0"; "2016: 112.7."
- External sector and external positions
  - Current account balance: "2010: -3¼ percent of GDP"; projected to remain around "3 percent of GDP over the medium term."
  - Cumulative value of U.S. current account deficits since 1999: "US$6.3 trillion."
  - Net international investment position (IIP) as of end-2010: "-$2.5 trillion (17 percent of GDP)."
- Financial sector and programs (as of May 31, 2011)
  - TARP programs: "473 / 412 / 131" (billions of dollars; Disbursed / Outstanding / Proposed or peak use).
  - Federal Reserve asset purchases (total): "2,350 / 2,350 / 900" (billions of dollars; Disbursed / Outstanding / Proposed or peak use).
  - Problem loans to total loans and leases (FDIC-insured institutions): "2011: 3.5."
  - Total capital to risk-weighted assets (SCAP institutions): "2011: 14.3"; "Latest: 15.3."

*Source: IMF 2011 Article IV Report — United States (excerpts from the supplied content).*

### 2011. The team comprised (at different times) Rodrigo Valdés (head),

### BACKDROP: A TEPID RECOVERY AMID STRAINED MACROECONOMIC POLICIES

### Summary
- The U.S. economy "continues to recover at a modest pace" and the recovery "has in fact been somewhat stronger than in a number of other major advanced economies."
- Unemployment "increased more sharply than in all other major advanced economies during the recession and remains high."
- Staff estimates the output gap "at around 4 percent in 2011."
- Core inflation "weakened to multi-decade lows in late 2010" but "has started to firm" and "remains contained given elevated resource slack."
- Monetary policy: "near-zero policy rates" and a "Fed balance sheet more than three times larger than at the start of the economic crisis."
- Main policy challenge: "strike the right balance between exiting from extraordinary support and sustaining the recovery."

*Key content sections in the source: BACKDROP; THE ANATOMY OF THE SLOW RECOVERY; OUTLOOK AND RISKS; POLICY DISCUSSIONS (A–F); STAFF APPRAISAL.*

### The Anatomy of the Slow Recovery
- Recovery held back by "significant adverse feedback loops between housing, consumption, and employment."
- Housing and labor markets described as "the weakest links."
- Financial conditions: improved "particularly for large firms" but "remain tight especially for small firms and real estate."
- Bright spots: "exports and the performance of businesses and the financial sector have improved significantly."

### Housing Markets and Household Balance Sheets
- Staff estimate of vacant residential units "around 3 million" contributing to depressed housing markets.
- House price projections: "Many analysts expect price declines of 3½ percent in 2011 on a fourth-quarter over fourth-quarter basis (with staff slightly more pessimistic)."
- Residential fixed investment has been "a drag on output and employment" after rebounding less than in most post-war recessions.
- Household leverage:
  - Household debt peaked at "133 percent of disposable income at the end of 2007."
  - Household debt declined to "119 percent as of the first quarter of 2011."
  - Pre-bubble average household debt about "90 percent of disposable income."
- Composition of household assets:
  - Overall net worth improved "from about 455 to 500 percent of disposable income between the second quarter of 2009 and the first quarter of 2011" due to a rebound in stock prices offsetting decline in real estate wealth.
  - Estimated sensitivities: "a 10 percent house price appreciation is estimated to raise consumption by 1.5 percent over the medium term."
  - Estimated marginal propensities: real estate "9 cents per one dollar" and net financial wealth "4 cents per one dollar" in their impact on consumption.

### Labor Markets
- Unemployment dynamics:
  - Unemployment "peaked at 10.1 percent in October 2009" and "has fluctuated around 9 percent in 2011."
  - As of May 2011, "aggregate employment was 6.6 million below the pre-crisis peak."
  - "More than 40 percent of the unemployed have been out of work for six months or more—a record level of long-term unemployment for the United States."
- Broader labor underutilization measures "remain near the historic peaks reached in 2010."
- Labor force participation and employment-to-population ratio: participation "fell significantly since the crisis" and the employment-to-population ratio "has fluctuated around its cycle-trough, the lowest level in more than 25 years."
- Potential rise in structural unemployment: sectoral mismatches (notably construction) and weak housing markets may have "put upward pressure on structural unemployment."

### Financial Sector Healing and Securitization
- Financial conditions:
  - "Liquidity is abundant thanks to near-zero policy rates and unconventional easing."
  - "Stock prices are about 15 percent above their August 2010 level."
  - Lending standards remain tight "especially for residential mortgages, small enterprises, and commercial real estate."
  - Commercial banks "are highly capitalized" but asset quality has "improved slowly"; coverage ratio and ratio of risk-weighted assets to total assets "are both low."
  - Private sector net borrowing "turned positive in the second half of 2010," while households are "still shedding debt."
- Securitization:
  - "Securitization activity remains substantially below pre-crisis levels, with the virtual disappearance of private-label residential mortgage-backed securities (RMBS) and complex structures."
  - Agency MBS issuance "has remained strong" while "private issuance of RMBS is still basically nil."
  - Factors reducing securitization incentives include:
    - "reduced demand for housing"; "reduced investor appetite"; "sizeable legacy assets still sitting on balance sheets";
    - Dodd-Frank Act retention requirement: originators to "retain at least five percent of the securitized credit risks" with exemptions for "qualified residential mortgage (QRM)" criteria;
    - Proposed "premium capture" cash reserve accounts for premium sale proceeds potentially "severely reduce securitization activity";
    - Historically-low funding rates; new accounting rules limiting derecognition and regulatory capital relief; demise of resecuritization vehicles such as SIVs; higher Basel III risk weights on resecuritization vehicles; investor preference for simpler products (e.g., auto ABS).

### Policy Constraints and Challenges
- Fiscal policy:
  - "Unsustainable public debt dynamics and the associated risks of interest rate pressures or a credit rating downgrade have brought the need for fiscal consolidation to the forefront."
  - U.S. federal government plans to embark on fiscal consolidation are noted in Figures/Tables in the source.
- Monetary policy constraints:
  - Limited room for significant further easing due to "near-zero policy interest rates," a swollen Fed balance sheet ("more than three times larger than at the start of the economic crisis"), and "firming core inflation."
- Policy trade-off: "A still-wide output gap, persistent housing and labor market fragilities, and downside risks to the outlook call for a cautious approach to unwinding macroeconomic support."

*This overlay summarizes the BACKDROP and ANATOMY OF THE SLOW RECOVERY sections of the United States 2011 Article IV Report.*

### 12.      While corporate spending remains

### 12.      While corporate spending remains

### Corporate sector, investment, and balance sheets
- Firms experienced record-high profit growth and large firms face easy financing conditions.
- Labor input saw deep cuts during the crisis, associated with sharp increases in labor productivity during the recovery.
- Firms have been retiring older debt in favor of newer bond issuance at lower interest rates.
- Private investment in equipment and software picked up relatively early in the recovery owing to strong replacement demand after the crisis plunge.
- Investment in nonresidential structures remains very weak.
- Non-residential private fixed investment: 9.9 percent of GDP in 2011Q1 as opposed to 11.4 percent on average between 1997 and 2007.
- Contributing factors to weak nonresidential investment: uncertainties on future demand and widespread unused capacity utilization.
- Historical correlations indicate elevated cash hoardings signal higher investment going forward (Selected Issues Paper, Chapter 5).

### External sector and net international position
- U.S. exports were buoyed by strong external demand, though the external sector did not add to growth overall.
- Current account balance: -3¼ percent of GDP in 2010, reflecting rebound in exports/imports and sharply higher oil prices.
- Pre-crisis average current account balance: -5¾ percent of GDP in the three years preceding the crisis.
- After appreciating in the first half of 2010, the dollar weakened substantially over the past year; the real effective exchange rate index reached its lowest level in decades—supporting exports and current account adjustment going forward.
- Cumulative value of U.S. current account deficits since 1999: US$6.3 trillion.
- U.S. net international investment position (IIP) as of end-2010: -$2.5 trillion (17 percent of GDP), reflecting substantial valuation gains due to dollar depreciation and asset price changes.
- Net income balance remains positive, supported by a preponderance of low-yielding debt instruments in U.S. liabilities and favorable return differentials on foreign direct investment.

### Outlook and projections
- Staff expects GDP growth between 2¾ percent and 3 percent from 2012 onwards.
- Recovery characterized by a slowly narrowing output gap (in contrast to rapid narrowing in previous recoveries).
- Drivers and composition:
  - Ongoing repair of household balance sheets and sluggish aggregate labor income growth (given slow decline in unemployment).
  - Projected medium-term fiscal adjustment.
  - Private investment in equipment and software expected to continue growing at robust rates.
  - Construction activity likely to remain weak in the near term.
- Given persistent output gap, core inflation projected to remain tame despite recent commodity price pickup (Selected Issues Paper, Chapter 6).
- Medium-term projections:
  - Both saving and investment projected to rise, leaving the current account deficit broadly stable around current values.
  - Household saving expected to soften with fiscal withdrawal in the next couple of years but return roughly to its current level over the medium term as fiscal deficits remain high, interest rates rise, and incomes recover with declining unemployment.
  - Public saving projected to rise as the output gap shrinks, stimulus expires, and some corrective budgetary measures come into place.
  - Private investment would recover toward pre-crisis averages as a percentage of GDP, with construction activity rebounding in line with normalization of new household formation.
  - Current account deficit projected to remain around 3 percent of GDP over the medium term.

### Inflation and labor market
- Core inflation remained subdued despite some recent firming.
- Wage inflation is tepid against a backdrop of persistently high unemployment.
- Twelve-month core consumer price inflation: 1.5 percent in May 2011, after declining to 0.6 percent at the end of 2010.
- Twelve-month headline consumer price inflation: 3.5 percent in May 2011.
- Elevated resource slack and stable longer-term inflation expectations expected to keep core inflation trends in check in the near term.

### Downside risks to the outlook
- Renewed housing market weakness with possibility of larger-than-expected house price declines.
  - Foreclosure starts have come down in past months largely due to delays from legal problems with past foreclosures.
  - Staff estimate of “shadow inventory” of houses: around 6 million units.
- Unfavorable fiscal outcomes:
  - Risks include a sudden increase in interest rates and/or a sovereign downgrade if agreement on medium-term consolidation does not materialize or the debt ceiling is not raised soon enough.
  - These risks could have significant global repercussions given the central role of U.S. Treasury bonds in world financial markets.
  - At the opposite extreme, an excessively large upfront fiscal adjustment could significantly weaken domestic demand.
- Further commodity price shocks, which could impact both growth and inflation.
- Credit supply constraints: uncertain ability of the financial sector to support faster expansion due to weak securitization markets and tight loan standards.
- Challenging conditions for some European sovereigns: renewed instability in European sovereign and bank debt markets could lead to global financial turmoil, including increased tensions in U.S. money markets given short-term dollar funding to major European banks.
- Upside possibilities: recovery could surprise on the upside if confidence improves and pent-up demand for consumer durables materializes more quickly, or if hiring picks up faster than expected given healthy corporate balance sheets.

### Fiscal policy and medium-term fiscal challenges
- Staff and authorities concurred on need for fiscal stabilization with urgency for a politically-backed framework.
- Agreed policy objective: stabilize the public debt-to-GDP ratio by mid-decade and gradually reduce it afterwards.
- Federal finances remain unsustainable despite health care reform and proposed 5-year freeze on non-security discretionary spending; state and local government finances also face significant challenges.
- Federal deficit this year could reach 9 percent of GDP, with the general government deficit nearly 10 percent of GDP.
- Long-term federal debt projections and issues (Box 3):
  - Authorities’ budget projections: federal debt held by the public projected to increase from 62 percent of GDP in FY2010 to about 90 percent in FY2030, and continue rising thereafter.
  - IMF staff’s more conservative assumptions: federal debt could exceed 95 percent of GDP already by the end of this decade.
  - Federal health care bill could still increase by 3 percent of GDP over the next 20 years according to the Congressional Budget Office.
  - Tax expenditures (loopholes and deductions) worth over 7 percent of GDP.
  - Options to achieve fiscal sustainability without large negative short-term effects:
    - Social Security reform (e.g., increase retirement age while indexing it to longevity; trim future benefits for upper-income retirees).
    - Identify additional savings in health care and other mandatory spending (greater cost sharing, curbs to tax exemption for employer-provided health care, targeted savings from President’s Fiscal Commission).
    - Gradual reduction of tax expenditures including eventually the mortgage interest deduction.
    - Consideration in the longer term of a national VAT or sales tax, as well as carbon taxes.
- State and local governments (Box 4):
  - SLGs coped with the Great Recession via aggressive spending cuts, some revenue measures, and reserve drawdown, with considerable social costs (cuts in education, health, transport, welfare).
  - Rainy-day funds depleted in almost half of the states; need to replenish.
  - Large unfunded pension commitments estimated in a wide range of $1–3 trillion.
  - Local vulnerabilities remain from housing market and cuts in state and federal transfers; local defaults historically rare.

### Select medium-term outlook table excerpts (percent change, unless otherwise noted; percent of GDP, unless otherwise noted)
- Real GDP: 2.1-2.6 2.9 2.5 2.7 2.7 2.9 2.9 2.8
- Personal consumption expenditures: 2.5-1.2 1.7 2.5 2.0 2.3 2.4 3.0 2.8
- Gross private fixed investment: 0.5-18.3 3.9 5.3 7.5 9.7 9.4 7.0 6.1
- Change in private inventories 1/: -0.1-0.7 1.4 0.1 0.1 0.1 0.1 0.0 0.0
- Government consumption and investment: 2.2 1.6 1.0 -1.5 -0.7 -1.9 0.5 0.8 1.5
- Net exports 1/: -0.2 1.3 -0.4 0.4 0.3 0.1 -0.2 -0.3 -0.3
- Potential GDP: 2.6 1.7 1.5 1.6 1.8 2.0 2.1 2.2 2.2
- Output gap 2/: -0.4 -6.0 -4.7 -3.9 -3.1 -2.5 -1.7 -1.0 -0.5
- Consumer price inflation: 2.8 -0.3 1.6 2.8 1.6 1.5 1.7 1.8 1.9
- Unemployment rate: 5.1 9.3 9.6 8.9 8.4 7.7 6.9 6.2 5.6
- Investment rate: 19.5 14.8 15.9 16.1 16.7 17.4 18.0 18.3 18.6
- Private saving: 14.9 17.6 18.2 18.7 18.7 18.0 17.9 18.2 18.6
- Household saving rate 3/: 2.9 5.9 5.7 4.7 4.7 4.6 4.7 4.8 4.9
- Government saving: 0.0 -6.7 -6.6 -6.3 -4.6 -2.9 -2.3 -2.5 -3.0
- Current account balance: -4.9 -2.7 -3.2 -3.2 -2.6 -2.3 -2.4 -2.6 -3.0
- Yield on 3-month treasury bill: 3.00 0.20 0.10 0.20 0.40 0.91 1.92 2.93 3.9
- Yield on 10-year treasury note: 4.63 3.3 3.2 3.5 4.4 5.4 5.8 6.0 6.2

*Source: IMF 2011 Article IV Report — United States (excerpts from the supplied content).*

### 21.      On the pace of consolidation, the

### _cr11201 - 21.      On the pace of consolidation,

### Pace and timing of fiscal consolidation
- Authorities envisage a frontloaded withdrawal; the President’s February budget proposal would cut the federal deficit to 4.6 percent of GDP in FY2013, over-delivering on the G-20 Toronto commitment to halve the federal deficit by FY2013.
- Deficit reduction over FY2012–13 would largely reflect expiring stimulus, lower military spending, and cyclical recovery.
- Ongoing debates over the debt ceiling and FY2012 appropriations, the recent soft patch in growth, and technical factors complicate assessment of the likely pace of adjustment.
- Staff view:
  - The February budget may be too front-loaded given cyclical weakness and downside risks.
  - Staff recommended a broadly uniform reduction of the federal structural primary deficit over the next five years within a fully-specified and politically-backed consolidation plan (Staff Adjustment Scenario).
  - Staff’s recommended FY2013 deficit target would be around 6 percent of GDP—over 1 percentage point of GDP higher than under the administration’s scenario.
  - Although financing conditions are benign for now, starting a withdrawal in FY2012 would hedge the risk of a disruptive loss in fiscal credibility.
  - Absent a fully-specified consolidation framework, fiscal adjustment should proceed more rapidly.
  - Authorities agreed that fiscal consolidation should proceed gradually and considered the anticipated growth drag from their current plans as manageable.

### Short-run effects of fiscal policy on activity (Box 5)
- Staff projections: expiration of temporary stimulus programs, lower defense spending and new deficit reduction measures will help reduce the federal deficit by 3¾ percent of GDP over the next two fiscal years, subtracting roughly 1 percentage point from GDP growth in both 2012 and 2013.
- Fiscal multipliers and channels:
  - Expiration of targeted spending measures (infrastructure investment, emergency aid to local governments, unemployment benefits): multipliers between 0.75–1.
  - Expiring tax provisions: multipliers between 0–0.6; multipliers for corporations and upper-income taxpayers closer to the lower bound.
  - Lower defense spending reduces government consumption and investment (direct output effect).
  - October 2010 World Economic Outlook estimates:
    - Average short-run multiplier around ½.
    - Consolidation more contractionary in the short run if perceived sovereign default risk is low, monetary policy is close to the zero bound, and trading partners are also consolidating.
    - Consolidation relying on cuts in transfers and government consumption: multipliers around ¼.
    - Multipliers larger for public investment: above ½.
    - Indirect tax hikes tend to have the largest multipliers (more than one-for-one fall in output).
- Staff baseline expectation: some expiring stimulus measures will be extended by Congress, implying a less front-loaded path than in the President’s February budget proposal.
  - Staff projects a FY2013 deficit of 5½ percent of GDP, assuming that the temporary payroll tax cut and emergency unemployment benefits are renewed.
  - Structural primary withdrawal would be around 3½ percent of GDP over two years, broadly in line with staff’s preferred scenario with a fully-specified consolidation plan.
  - Should the growth outlook worsen considerably, consolidation could proceed at an even slower pace over the next two years, provided a medium-term framework is in place and financing conditions remain favorable.

### Extent and composition of consolidation
- President’s April speech: proposed framework would save about $4 trillion over 12 years (some 20 percent of GDP) and, according to the authorities, put public debt on a downward path in the second half of the decade.
- Measures worth $1–2 trillion could be decided during June and July amid the debt ceiling debate (debt ceiling must be raised by August 2, per the Treasury).
- A debt stabilization mechanism (“debt failsafe”) would trigger automatic spending cuts or revenue increases if the debt ratio does not stabilize.
- Staff assessment:
  - A larger and wider-ranging consolidation than envisioned in the budget and the President’s speech would be needed based on staff’s less favorable macroeconomic assumptions.
  - Under the staff’s adjustment scenario, a cumulative structural primary deficit reduction of 7½ percentage points of GDP (about 1½ p.p. per year) would achieve the objective of stabilizing the debt ratio by mid-decade, and then gradually reducing it.
  - The President’s February budget proposal falls short of this target by 2½ percent of GDP. Savings identified in the April speech would reduce but not eliminate the required additional adjustment.
  - The deficit reduction plan will need to include both entitlement changes and revenue-enhancing measures given pressures from population aging and excess health care costs.
  - Administration proposals would already cut the share of non-security discretionary spending in GDP to very low levels.
  - Additional measures can include Social Security reform, additional savings in health care and other mandatory spending categories, and reducing tax expenditures (which amount to 7 percent of GDP according to the President’s Fiscal Commission).
  - In the longer term, consideration could be given to introducing a national value added tax (VAT) or sales tax, as well as carbon taxes.
  - Administration noted that, given the divided Congress, fundamental reform of entitlements and the tax code may need to wait until after the 2012 elections.

### Institutional enhancements and fiscal framework
- Staff and authorities agreed institutional enhancements could support consolidation:
  - Debt “failsafe” mechanism and a multi-year expenditure envelope for non-security discretionary spending could help keep consolidation on track across annual budget cycles.
  - Staff cautioned against overemphasizing the failsafe mechanism given mixed experience with automatic spending cuts.
  - Staff recommended the deficit reduction plan include as many specific measures as possible and clear specification of the medium-term fiscal objectives—formally endorsed by Congress.
  - Staff suggested attaching greater weight to private sector forecasters and other outside institutions given administration growth projections remain well above Consensus and CBO forecasts.
  - Authorities argued the failsafe mechanism would provide protection against deficit overruns in case of weak medium-term growth.

### International spillovers
- Staff analysis suggests fiscal consolidation has clear long-term global benefits (Box 2).
- Short-term losses likely small beyond close trading partners (Canada and Mexico).
- Consultations with other authorities highlighted concerns about international ramifications of lack of U.S. fiscal adjustment on long-term interest rates and the dollar.
- Staff analysis suggests a credible, phased-in U.S. fiscal consolidation would forestall a rise in U.S. (and foreign) yields, limiting short-term negative spillovers and reinforcing the case for such policy.
- Authorities agreed U.S. fiscal stabilization would bring global benefits but saw growth spillovers from fiscal policy as larger and more wide-ranging than in staff’s analysis.

### Housing markets: easing adjustment and mitigating distress
- Housing market expected to stabilize over the next couple of years and gradually recover thereafter.
- Risk of house price undershooting exists given sizable shadow inventory of potential distress sales; distress sales disproportionately affect average house prices.
- Administrative complexity, capacity constraints, and conflicting incentives among banks, servicers, and bond investors have hindered efficient loan modifications that could avoid some foreclosures.
- Distress sales are identified as main driving force behind recent house price declines; excluding distress sales, house prices had stopped falling.
- Staff recommendations to strengthen foreclosure mitigation policies:
  - Allow mortgages to be modified in courts (“cramdowns”) to create incentives for voluntary modifications at no fiscal cost; authorities acknowledged potential usefulness but noted insufficient political support in 2009.
  - Expand state programs assisting unemployed homeowners and adopt parametric changes to existing programs (e.g., lowering back-end debt-to-income ratios and bringing loan-to-value ratio below 100 percent in programs like HAMP-PRA).
    - Authorities noted lowering back-end debt-to-income ratios is under consideration and high back-end debt-to-income ratios raise re-default rates.
    - Authorities cautioned that aggressively reducing LTV ratios could lead to moral hazard and noted a large proportion of negative equity mortgages remains current.
    - Staff suggested attaching clauses to modifications to ensure sharing of gains from future home price appreciation between homeowners and the counterparty in the modification.
  - Encourage GSEs to participate in principal write-downs to significantly increase scope for modifications.
    - FHFA estimates out of its 30 million pool of guaranteed mortgages (worth US$5 trillion), around 600,000–800,000 are currently underwater and in default.
    - FHFA has declined principal writedowns citing subordinate liens, mortgage insurance, potential losses on GSEs (inconsistent with conservatorship mandate), and inducement of intentional default.
    - Staff noted positive externalities from lowering housing market uncertainty likely outweigh these costs, especially given large contingent fiscal liability of the U.S. Treasury.
    - OCC analysis indicates modifications significantly reducing monthly principal and interest payments consistently perform better.
    - Staff suggested providing additional incentives for deed in lieu and short sales.

### Administration’s response to the housing crisis (Box 6) — selected facts and outcomes
- As of end-March 2011 only $1.4 billion out of the $45.6 billion allocated through TARP for housing support measures has been disbursed.
- HAMP: 670,000 permanent modifications completed out of the 1.6 million modifications started since inception; another 2,174 permanent modifications completed on FHA-insured loans through FHA-HAMP.
- Second Lien Modification Program: 21,230 modifications completed so far.
- Home Affordable Foreclosure Alternatives Program: 5,250 short sales or deeds in lieu completed so far.
- Home Affordable Unemployment Program: 7,400 participants thus far.
- Hardest Hit Fund Program: committed $7.6 billion to heavily distressed states; only $165 million spent so far.
- FHA’s Short-Refinance Program ($8-billion): refinanced 107 loans through end-March.
- Other initiatives with more impact:
  - Homebuyers tax credit supported housing sales while it was active.
  - Private sector, including the GSEs, started 2.2 million modifications under Hope Now.
  - More than 800,000 FHA-insured mortgages have avoided foreclosure via loss mitigation plans.
  - Federal Reserve and U.S. Treasury purchased more than $1.4 trillion in agency mortgage-backed securities through independent purchase programs, helping keep mortgage rates low.

### Labor markets: lowering unemployment and improving matching
- Authorities noted recently adopted measures helped buoy the labor market and speed up hiring:
  - Administration enacted programs including the “jobs agenda” and the December 2010 stimulus package, which included a temporary payroll tax cut for employees.
  - Authorities attributed part of the pickup in hiring at the end of 2010–beginning of 2011 to the payroll tax cuts and viewed past efforts as important to limit labor market slack.
- Staff suggestions:
  - Some measures (extension of unemployment insurance and the payroll tax cuts) could be extended in 2012 and/or new targeted measures to induce hiring of the long-term unemployed could be enacted, given long-term consequences of skill degradation on productivity, real wages, and trend consumption spending.
- Authorities stressed any deviation from existing policies would depend on labor market performance in the remainder of the year.

*Source: 2011 ARTICLE IV REPORT — UNITED STATES, INTERNATIONAL MONETARY FUND.*

### 30.      Staff inquired whether risks of

### _cr11201 - 30.      Staff inquired whether risks of

### Labor market risks, programs, and training
- Staff inquired whether risks of higher structural unemployment justify a re-evaluation of existing policies to train and place the unemployed into jobs.  
- Federal government programs and budgets:
  - Nearly 50 different programs dispersed across nine federal departments geared toward helping the unemployed.
  - Cumulative budget of only 0.1 percent of GDP.
  - A large part of this budget is transferred to states, which have many programs of their own.
- Potential policy responses and assessment:
  - It could be important to assess whether some consolidation of the system—with better funding—would be more effective in facilitating the labor market adjustment.
  - Authorities recognized some re-evaluation of existing programs could be productive but stressed the education system—which is not part of this array of programs—also plays an important role in re-training the unemployed.
  - Officials argued for using community colleges (as in a recent government initiative geared toward manufacturing jobs), which offer flexible curricula and are more aligned to the demands of local employers, as a way to channel training programs.
- Institutional reform to limit employment volatility:
  - The U.S. labor market has benefited from great flexibility, but at the cost of high employment volatility, which may have medium-term consequences when the unemployment rate does not recover quickly.
  - Staff and authorities agreed that adopting some aspects of the short-time compensation programs present in other countries (e.g., Germany and, to a lesser extent, Canada) could help reduce the cyclical burden on employment.

### Monetary policy: continued accommodation and normalization strategy
- Assessment of recent stance:
  - Monetary policy provided needed support to the recovery while maintaining inflation expectations well anchored.
  - Strategy included near-zero policy rates, clear communication that conditions would likely warrant exceptionally low policy rates for an extended period, and a second round of unconventional easing beginning in the Fall of 2010 in response to weakening of inflation and growth.
  - Federal Reserve officials considered that large-scale asset purchases had effects on the real economy through conventional monetary transmission channels, even if their impact on longer-term yields had been more direct than those of conventional policy.
  - The impact of the second large scale asset purchase program on longer-term yields had been harder to detect, as markets incorporated the policy into their expectations over a period of time rather than in response to discrete policy announcements as in the first round.
- Outlook and guidance for policy timing:
  - Well-anchored inflation expectations and significant resource underutilization suggest that the extraordinarily low level of short-term interest rates will likely remain appropriate for quite some time.
  - Speed and timing of future actions should depend on incoming data on core inflation, longer-term inflation expectations, and growth, with scope to react to a more aggressive fiscal consolidation through a slower withdrawal of monetary stimulus.
  - Temporary factors—including pass-through from higher commodity prices—had recently pushed core inflation up; authorities anticipated that inflation would fall back to more subdued levels over the coming quarters as those effects passed and as persistent labor market slack would keep wages in check.
- Normalization steps discussed:
  - Ending the policy of reinvesting the principal of maturing securities seems to be a reasonable first step in normalizing monetary conditions when warranted by the economic outlook.
  - Against the backdrop of a passive unwinding through ceasing reinvestment of maturing securities, short-term policy interest rates would serve as the main active tool to fine tune the adjustment of monetary conditions.
  - Reducing excess reserves by ceasing reinvestments of the principal of at least a portion of maturing securities, as well as other reserve-draining operations—including the use of repos and term deposits—would also help tighten the link between the federal funds target rate and the interest rate on reserves.
  - A clearly communicated and gradual path of asset sales would be an additional step in the exit process.
  - Federal Reserve officials stressed that members of the Federal Open Market Committee would continue to weigh the relative merits of various sequencing options for the eventual normalization of monetary policy.
- International spillovers and communication:
  - Main risk is a likely reversal of some inflows to emerging markets if markets suddenly bring forward expectations of monetary tightening, suggesting a premium on clear communication.
  - While the second large scale asset purchase program had limited spillovers and its ending will have even less as it is fully anticipated, there is a risk that when the Fed gets closer to tightening (e.g., by draining liquidity), Treasury yields could jump and there could be sharp capital outflows from emerging markets, particularly if this were unexpected.
  - Senior Fed officials considered that most capital flows to emerging markets were structural, suggesting limited risk of significant pull-backs in response to monetary tightening.
  - Staff welcomed the introduction of regular press briefings to present the Federal Open Market Committee’s economic projections and to provide further context to its decisions.

### Financial policy: restoring financial resilience and regulatory reform
- Financial system health and indicators:
  - Government investments were being steadily repaid, with banks paying a net $12 billion so far, and Fed financial system support at minimal levels.
  - Banks’ tier 1 risk-based capital ratios stood at 13 percent and the leverage ratio at 9.1 percent at the end of 2011Q1 (compared with just under 10 percent and 7½ percent respectively at end-2008).
  - The tier 1 common capital ratio for SCAP institutions stood at 9.8 percent.
  - Liquidity indicators had improved, although increased reliance on business deposits was a concern.
  - Profits were recovering, but largely owing to reduced provisioning; return on assets remained weaker than pre-crisis levels.
- Remaining vulnerabilities and spillovers:
  - Important vulnerabilities remained, especially from potential spillovers from possible turmoil in Europe.
  - Direct credit exposures to the most stressed countries were modest, but U.S. banks had substantial exposure to major European institutions that play important roles in U.S. derivatives, securities and lending markets.
  - Strains among the European banks could disrupt U.S. money market funds, which hold considerable amounts of their paper.
  - Staff expressed concerns that stress in the U.S. Treasury market related to the approaching debt limit could severely disrupt global financial stability.
- Securitization and market functioning:
  - Banks’ balance sheets were strong enough to support lending, but a revival of securitization was seen as essential to supply the needed credit into a stronger recovery.
  - Securitization had collapsed to a fraction of its pre-crisis level, notably in private residential mortgage-backed securities, weighed down by housing market fragility, weak demand for residential properties, and regulatory uncertainty.
  - Team and authorities agreed initiatives to strengthen risk retention and disclosure and redefine the roles of rating agencies (with greater emphasis on investor due diligence and steps to address potential conflicts of interest) were essential.
  - Authorities disagreed with private concerns that proposals for risk retention were stifling private securitization, noting that reforms would over time revive the market by improving investor confidence.
  - Authorities saw the dominance of the housing GSEs as a more important obstacle to a recovery of private mortgage securitization, but also as a needed support at the current juncture—and thus as an issue for the longer term.
- Policy overhaul, Dodd-Frank Act (DFA), and FSAP follow-up:
  - Discussions were shaped by the FSAP conducted in 2010 and the Dodd-Frank Act enacted in July 2010.
  - Authorities noted that 32 of the 33 key FSAP recommendations had been completed or were being implemented.
  - Staff expressed concerns that the regulatory system remained fragmented (a key unaddressed recommendation), posing challenges to coordination domestically and internationally.
  - Effectiveness of the new regulatory framework in stemming systemic risk and containing risks from too-big-to-fail was yet to be tested; headwinds to implementation included funding new activities and making key appointments.
- Three key areas for expeditious action urged by the team:
  - Dealing with systemically important financial institutions (SIFIs):
    - Urged prompt designation of SIFIs—a key FSOC responsibility.
    - SIFIs—including investment banks and other nonbanks—should face tough capital and liquidity standards to internalize systemic risks.
    - Authorities concurred on the key role of measures to strengthen the ex-ante resilience of the financial system to future crises.
    - Designation would take time given the complexity of the associated analysis.
    - Resolution plans (“living wills”) for SIFIs could reduce systemic risks and strengthen crisis resolution, though staff was skeptical that several large institutions could be resolved simultaneously in stressed markets and encouraged use of DFA powers to preemptively streamline firms that were too complex to resolve in a crisis.
  - Potential migration of risks to “shadow banking”:
    - Essential to apply rules and supervision that avoid the reemergence of this destabilizing dynamic.
    - Steps such as floating asset valuation, capital, or backstops are needed to deal with fragilities in money market funds to avoid “runs” that occurred post Lehman.
    - Strengthening nonbank liquidity management was especially important given possible migration of liquidity risks outside banks and that nonbank liquidity support was limited to emergency facilities (the Fed’s 13 (3) powers).
    - Authorities were vigilant for liquidity risks and risk migration and considered they had adequate tools to respond, with the FSOC playing the role of “residual claimant” of financial system risks that might otherwise fall through the cracks.
- FSAP implementation metrics (Box 8):
  - As of June 1, 2011:
    - 24 of the 87 studies required by DFA had been completed.
    - Of the estimated 385 DFA statutory deadlines for rulemaking: rules had been finalized in 24 instances and proposed in 115, while 28 deadlines had been missed and 218 were forthcoming.
  - FSOC progress:
    - FSOC had defined internal structure and processes, established committees, held five meetings and issued three Notices of Proposed Rulemaking (on designation as systemically important financial institutions of financial market utilities, nonbanks, and on data collection).
    - No systemically important financial institutions to be subject to heightened prudential standards had been designated yet.
    - The first annual report was expected to be published in the second half of the year.
  - Regulatory restructuring and supervision:
    - Modest streamlining introduced by DFA (transfer of responsibilities of OTS to OCC, FDIC and Fed) was on track.
    - Federal Insurance Office (FIO) and the Bureau of Consumer Financial Protection (BCFP) were established, although delay in designation of the director of the BCFP posed concerns.
    - Micro-prudential regulation and supervision were being strengthened, including enhanced prudential regulation for designated SIFIs and banking organizations with more than $50 billion in assets.
    - SEC and CFTC had proposed a large number of rules and were working closely together on implementation.
    - Progress was expected on recommendations discouraging the use of deposits in the shadow banking system and on the repo market; disclosure for money market funds had already been increased.
    - In the insurance sector, a number of rules to strengthen regulation were being considered.

*UNITED STATES  2011 ARTICLE IV REPORT INTERNATIONAL MONETARY FUND*

### Box 8. U.S. FSAP Recommendations One Year Later and DFA Implementation (continued)

### Box 8. U.S. FSAP Recommendations One Year Later and DFA Implementation (continued)

### Oversight of market infrastructure
- The Fed is working to implement the provisions of the DFA that allow the Fed to offer accounts and services to designated systemically important financial market utilities.
- The Fed is also working with other agencies to bolster the oversight of clearing, payment, and settlement systems.
- The CFTC and the SEC proposed rules to adopt many of the Committee on Payment and Settlement Systems (CPSS) and IOSCO recommendations for central clearing counterparties.

### Crisis management, resolution, and systemic liquidity arrangements
- Rules implementing the new orderly liquidation authority (OLA) of the FDIC over bank holding companies and designated SIFIs are being proposed.
- Rulemaking to implement “living wills” for large and complex financial groups is underway.
- The size of the Deposit Insurance Fund was allowed to increase.
- A limited widening of the range of counterparties and collateral in open market operations was pursued.

### Addressing too-big-to-fail and GSE reform
- In addition to OLA and living wills, the Fed is developing heightened prudential standards for large banking organizations and non-bank SIFIs.
- The DFA provided regulators with authority to take pre-emptive actions when covered institutions pose a grave threat to U.S. financial stability or fail to submit a credible living will.
- Various proposals on the future of the GSEs are being examined, most notably those laid out in the Administration’s white paper.

### FSOC and financial surveillance
- Staff viewed transparent and proactive surveillance of systemic risks and policy responses under FSOC as essential as FSOC moves beyond the initial implementation stage.
- Given the complexity of the supervisory framework and that only two of ten FSOC voting members have a macroeconomic remit, transparency was seen as key to reinforcing focus on systemic risk; the team welcomed the forthcoming annual report.
- Authorities reported the FSOC process as working well and fostering continuous interaction among committee and subcommittee members on financial stability issues; they stressed commitment to FSOC transparency while noting disclosure of sensitive information could precipitate market volatility.
- The DFA requirement that FSOC voting members submit signed statements to Congress affirming whether they believe that all reasonable steps are being taken to ensure financial stability and mitigate systemic risks would guarantee strong accountability.

### International coordination and spillovers
- Authorities agreed that international coordination was key to avoid cross-border regulatory arbitrage and saw coordination as working well through groupings such as the Basel Committee, Financial Stability Forum, and IOSCO.
- Major issues remained complex and under active discussion, including cross-border resolution of SIFIs and derivatives (level of clearing and rules for margining of uncleared swaps).
- Authorities saw their timetable as more aggressive than overseas partners, opening the possibility of regulatory gaps, notably in securities and OTC derivatives regulation.
- Staff noted the risk of spillovers to and from the U.S. financial system strengthened the case for making the U.S. financial system more resilient; the Dodd-Frank Act seemed to have reduced the risk of potential knock-on effects from U.S. financial instability.
- Analysis in the Spillovers Report highlighted that investment banking activities (including by non-U.S. firms) could propagate shocks internationally via the U.S. dollar wholesale funding markets, underscoring the need for strong prudential supervision of those activities.

### Housing finance reform options and domestic policy
- Authorities and staff agreed current government presence in the housing market was neither sustainable nor desirable.
- The Administration’s February 2011 report to Congress (Reforming America’s Housing finance Market) would shift government focus to: (i) oversight and consumer protection, (ii) assistance for low- and moderate- income homeowners and renters, and (iii) support for market stability and crisis response.
- The report offers three long-term options:
  - (i) a fully privatized system of housing finance, with the government helping low and middle-income borrowers;
  - (ii) a privatized system plus a public guarantee mechanism that can be scaled up in a crisis, with an above-market guarantee fee attractive only during market stress;
  - (iii) a privatized system plus public catastrophic reinsurance, with first-loss insurance coverage from private sources.
- Staff urged that housing finance reform be complemented by gradually reducing distortions such as the mortgage interest deductions, which are described as expensive, regressive, and biasing homeownership towards large homes.
- Congress could deliberate proposals as early as this fall.

### Staff appraisal: fiscal policy, monetary exit, and structural policies
- Policies must balance exiting extraordinary support and sustaining the recovery amid renewed headwinds; fiscal consolidation needs to proceed as debt dynamics are unsustainable.
- Key fiscal priority: stabilize the debt ratio by mid-decade and gradually reduce it afterwards, consistent with the administration’s objectives.
- Staff sees early political agreement on a comprehensive medium-term consolidation framework based on realistic macroeconomic assumptions as a cornerstone of credible fiscal adjustment.
- Recommended adjustment strategy:
  - Reduction of the federal structural primary deficit at a broadly uniform pace over the next five years, within a fully-specified and politically-backed consolidation framework.
  - Fiscal adjustment should start in FY2012.
  - Measures should encompass cuts in mandatory spending (including through entitlement reforms) as well as revenue increases (including by reducing tax expenditures).
  - Consideration could be given to a national VAT or sales tax and carbon taxes, consistent with past advice by Fund staff.
- Fiscal framework recommendations:
  - Explicit Congressional endorsement of main medium-term fiscal objectives.
  - Multi-year expenditure caps on non-security discretionary spending.
  - A “failsafe” mechanism for the debt ratio along lines recently suggested by the President, if robustly formulated.
  - Prepare administration budgets using conservative economic assumptions.
- Monetary policy and exit:
  - Subdued inflation and significant resource underutilization suggest extraordinarily low short-term interest rates will likely remain appropriate for quite some time.
  - The Fed should remain vigilant to the risk of an unmooring of long-term inflation expectations and respond decisively should the risk materialize in either direction.
  - Speed and timing of future actions should depend on incoming data on core inflation, longer-term inflation expectations, and growth, with scope for cushioning a larger fiscal consolidation through a more back-loaded withdrawal of monetary stimulus.
  - When appropriate, a gradual unwinding of the Fed’s balance sheet seems a reasonable first step: passive unwinding through ceasing reinvestment of principal of maturing securities; short-term policy interest rates would serve as main active tool; reduce excess reserves by ceasing reinvestments and other reserve-draining operations (repos and term deposits); a clearly communicated and gradual path of asset sales would be an additional exit step.

### Housing and labor market support within fiscal constraints
- Housing policies recommended (noting operational capacity constraints and moral hazard risks):
  - Consider allowing for the terms of residential mortgages to be changed in courts (“cramdowns”).
  - Strengthen federal mortgage modification programs.
  - Expand state programs that assist unemployed homeowners.
  - Encourage the GSEs to participate in principal write-downs.
- Labor market and retraining measures:
  - Re-examine active labor market programs (job training and job-search assistance).
  - Education system, including community colleges, to play a strong role in retraining the unemployed.
  - Further tax cuts attached to programs aimed at spurring hiring of long-term unemployed workers could be enacted.

### Financial sector health, securitization, and implementation risks
- The U.S. financial system continues to heal but remains vulnerable: bank profitability has recovered and bank capital has increased, but underlying profits are weak and capital ratio rises reflect shifts toward less risky assets.
- Mortgage markets remain largely government dependent.
- Turmoil in European financial markets could impact liquidity and credit provision.
- Tail risk: a U.S. sovereign rating downgrade and sharply higher interest rates could trigger renewed turbulence in global financial markets.
- Sustainable rebound in private securitization would help meet credit demand as recovery takes hold; reforms (increasing disclosure and risk retention) will strengthen incentives for sound underwriting and should help revive investor demand.
- Clarity on the final scope of new rules would help market recovery.
- Reforms to streamline the role of GSEs (preferably confining activities to providing credit guarantees for high-quality mortgages under tail risks) would encourage a gradual shift toward private institutions.
- Progress in implementing the Dodd-Frank Act is encouraging, with nearly all U.S. FSAP recommendations being addressed, but headwinds to implementation are concerning:
  - Appropriate budgetary resources to fund improvements in supervision and regulation should be promptly allocated.
  - Efforts to delay or water down legislation should be resisted.
  - Prolonged delays or failures in addressing regulatory gaps, amid plentiful liquidity and increased financial concentration, could feed another dangerous buildup in systemic risks.

### Priorities on systemic institutions, resolvability, and international leadership
- Strengthening domestic and international crisis-prevention architecture should be a priority:
  - Promptly and comprehensively identify systemic institutions to be subject to heightened supervisory scrutiny, regulatory standards, and capital surcharges, including investment banks and other nonbank financial institutions providing significant cross-border dollar funding.
  - Continue improving resolvability of systemically important institutions.
  - FSOC discussions of systemic issues and risks in its first annual report are anticipated.
- Authorities should be alert to potential new risks arising from regulatory changes that could shift financial stability risks across borders or intermediaries.
- International collaboration will be critical; U.S. authorities should continue exercising leadership.

### Multilateral policy role and trade
- A multilateral approach to economic policy management remains critical, especially for systemic countries like the United States.
- Key medium-term U.S. contributions to global growth and stability (consistent with the G-20 Mutual Assessment Process):
  - (i) raising domestic savings, particularly through fiscal consolidation, to ensure the current account deficit declines further and to forestall destabilizing increases in public indebtedness;
  - (ii) strengthening its financial sector through enhanced regulation and supervision.
- The U.S. can no longer play the role of global consumer of last resort, underscoring the importance of measures to boost demand in current account surplus countries.
- The U.S. dollar depreciation over the past year would help increase demand for U.S. exports and contribute to global rebalancing.
- Staff welcomes the limited recourse to protectionist measures and encourages authorities, with other countries, to redouble efforts to secure the future of multilateral trade negotiations, especially if the Doha Round is not concluded by year-end.

*Source: Box 8, U.S. FSAP Recommendations One Year Later and DFA Implementation (continued), 2011 ARTICLE IV REPORT UNITED STATES, INTERNATIONAL MONETARY FUND.*

### 61.      Staff proposes to hold the next

### 61.      Staff proposes to hold the next Article IV Consultation on a 12-month cycle.

### Macroeconomic outlook and projections
- Real GDP:
  - 2009: -2.6
  - 2010: 2.9
  - 2011: 2.5
  - 2012: 2.7
  - 2013: 2.7
  - 2014: 2.9
  - 2015: 2.9
  - 2016: 2.8
- Net exports (contribution to real GDP growth, percentage points):
  - 2009: 1.3
  - 2010: -0.4
  - 2011: 0.4
  - 2012: 0.3
  - 2013: 0.1
  - 2014: -0.2
  - 2015: -0.3
  - 2016: -0.3
- Total domestic demand:
  - 2009: -3.6
  - 2010: 3.2
  - 2011: 2.0
  - 2012: 2.2
  - 2013: 2.4
  - 2014: 2.9
  - 2015: 3.1
  - 2016: 3.0
- Private final consumption:
  - 2009: -1.2
  - 2010: 1.7
  - 2011: 2.5
  - 2012: 2.0
  - 2013: 2.3
  - 2014: 2.4
  - 2015: 3.0
  - 2016: 2.8
- Gross fixed domestic investment:
  - 2009: -14.8
  - 2010: 3.3
  - 2011: 4.0
  - 2012: 6.0
  - 2013: 7.2
  - 2014: 7.5
  - 2015: 5.6
  - 2016: 4.9
- Nominal GDP:
  - 2009: -1.7
  - 2010: 3.8
  - 2011: 4.0
  - 2012: 3.9
  - 2013: 3.8
  - 2014: 4.2
  - 2015: 4.5
  - 2016: 4.5
- Personal saving rate (percent of disposable income):
  - 2009: 5.9
  - 2010: 5.8
  - 2011: 4.7
  - 2012: 4.7
  - 2013: 4.6
  - 2014: 4.7
  - 2015: 4.8
  - 2016: 4.9

### Employment, output gap, and inflation
- Unemployment rate:
  - 2009: 9.3
  - 2010: 9.6
  - 2011: 8.9
  - 2012: 8.4
  - 2013: 7.7
  - 2014: 6.9
  - 2015: 6.2
  - 2016: 5.6
- Output gap (percent of potential GDP):
  - 2009: -6.0
  - 2010: -4.7
  - 2011: -3.9
  - 2012: -3.1
  - 2013: -2.5
  - 2014: -1.7
  - 2015: -1.0
  - 2016: -0.5
- Potential GDP:
  - 2009: 1.7
  - 2010: 1.5
  - 2011: 1.6
  - 2012: 1.8
  - 2013: 2.0
  - 2014: 2.1
  - 2015: 2.2
  - 2016: 2.2
- CPI inflation:
  - 2009: -0.3
  - 2010: 1.6
  - 2011: 2.8
  - 2012: 1.6
  - 2013: 1.5
  - 2014: 1.7
  - 2015: 1.8
  - 2016: 1.9
- GDP deflator:
  - 2009: 0.9
  - 2010: 1.0
  - 2011: 1.4
  - 2012: 1.2
  - 2013: 1.1
  - 2014: 1.3
  - 2015: 1.5
  - 2016: 1.7

### Government finances (federal and general government)
- Federal government (budget, fiscal years):
  - Federal balance (percent of GDP):
    - 2009: -11.4
    - 2010: -9.6
    - 2011: -9.3
    - 2012: -7.6
    - 2013: -5.6
    - 2014: -4.7
    - 2015: -4.8
    - 2016: -5.3
  - Debt held by the public (percent of GDP):
    - 2009: 53.5
    - 2010: 62.1
    - 2011: 70.2
    - 2012: 74.6
    - 2013: 78.3
    - 2014: 80.7
    - 2015: 82.7
    - 2016: 85.0
- General government (GFSM 2001, calendar years):
  - Net lending (percent of GDP):
    - 2009: -12.7
    - 2010: -10.3
    - 2011: -9.9
    - 2012: -7.8
    - 2013: -6.0
    - 2014: -5.3
    - 2015: -5.6
    - 2016: -6.0
  - Primary structural balance (percent of potential nominal GDP):
    - 2009: -5.1
    - 2010: -5.5
    - 2011: -5.5
    - 2012: -4.0
    - 2013: -2.5
    - 2014: -1.8
    - 2015: -1.7
    - 2016: -1.6
  - Gross debt (percent of GDP):
    - 2009: 84.2
    - 2010: 93.5
    - 2011: 99.0
    - 2012: 103.0
    - 2013: 106.2
    - 2014: 108.2
    - 2015: 110.2
    - 2016: 112.7
- Interest rates (percent):
  - Three-month Treasury bill rate:
    - 2009: 0.2
    - 2010: 0.1
    - 2011: 0.2
    - 2012: 0.4
    - 2013: 0.9
    - 2014: 1.9
    - 2015: 2.9
    - 2016: 3.9
  - Ten-year government bond rate:
    - 2009: 3.3
    - 2010: 3.2
    - 2011: 3.5
    - 2012: 4.4
    - 2013: 5.4
    - 2014: 5.8
    - 2015: 6.0
    - 2016: 6.2

### External sector and balance of payments
- Current account balance (billions of dollars):
  - 2009: -378
  - 2010: -470
  - 2011: -489
  - 2012: -410
  - 2013: -375
  - 2014: -409
  - 2015: -473
  - 2016: -553
- Current account balance (percent of GDP):
  - 2009: -2.7
  - 2010: -3.2
  - 2011: -3.2
  - 2012: -2.6
  - 2013: -2.3
  - 2014: -2.4
  - 2015: -2.6
  - 2016: -3.0
- Merchandise trade balance (billions of dollars):
  - 2009: -507
  - 2010: -647
  - 2011: -703
  - 2012: -702
  - 2013: -723
  - 2014: -769
  - 2015: -839
  - 2016: -918
- Exports (billions of dollars):
  - 2009: 1,068
  - 2010: 1,289
  - 2011: 1,490
  - 2012: 1,577
  - 2013: 1,669
  - 2014: 1,784
  - 2015: 1,909
  - 2016: 2,044
- Imports (billions of dollars):
  - 2009: -1,575
  - 2010: -1,936
  - 2011: -2,194
  - 2012: -2,279
  - 2013: -2,393
  - 2014: -2,553
  - 2015: -2,748
  - 2016: -2,961
- Balance on invisibles (billions of dollars):
  - 2009: 129
  - 2010: 177
  - 2011: 214
  - 2012: 293
  - 2013: 348
  - 2014: 360
  - 2015: 366
  - 2016: 365
- Memo item: Current account excluding petroleum (billions of dollars):
  - 2009: -160
  - 2010: -186
  - 2011: -128
  - 2012: -46
  - 2013: -9
  - 2014: -39
  - 2015: -94
  - 2016: -162

### Saving and investment (percent of GDP)
- Gross national saving:
  - 2009: 10.9
  - 2010: 11.6
  - 2011: 12.3
  - 2012: 14.1
  - 2013: 15.1
  - 2014: 15.6
  - 2015: 15.7
  - 2016: 15.6
- Gross domestic investment:
  - 2009: 14.8
  - 2010: 15.9
  - 2011: 16.1
  - 2012: 16.7
  - 2013: 17.4
  - 2014: 18.0
  - 2015: 18.3
  - 2016: 18.6

### Federal and other financial stability programs (as of May 31, 2011)
- TARP and housing, banking, and other programs (billions of dollars; Disbursed / Outstanding / Proposed or peak use):
  - TARP programs: 473 / 412 / 131
  - Housing programs: 46 / 2 / n.a.
  - Bank-related programs: 250 / 245 / 23
  - Other financial stability programs: 95 / 85 / 69
- Federal Reserve facilities and asset purchases (billions of dollars; Disbursed / Outstanding / Proposed or peak use):
  - Asset purchases (total): 2,350 / 2,350 / 900
  - Treasury securities: 900 / 900 / 900
    - Purchases in 2009-10: 300 / 300 / 300
    - Purchases in 2010-11: 600 / 600 / 600
  - Government Agency and Mortgage-Backed Securities: 1,450 / 1,450 / 1,037
  - American International Group and Bear Stearns related programs: 195 / 195 / 64
  - Term Asset-Backed Securities Lending Facility: 48 / 48 / 14
- Support for Government-Sponsored Enterprises (GSEs):
  - Total Senior Preferred Equity injections: n.a. 2/ / 156 / 156
  - Fannie Mae: n.a. 2/ / 91 / 91
  - Freddie Mac: n.a. 2/ / 65 / 65

### Key FSAP recommendations (timing and priority as provided)
- Redesign the regulatory architecture:
  - Establish a council of the regulatory agencies, the Fed, and the Treasury with mandate for financial stability (ST, HP)
  - Define the Fed as the lead executor of this council and consolidated supervisor of designated potentially systemic financial firms (ST, HP)
  - Provide the Fed oversight authority over systemically important payment, clearing, and settlement infrastructure (ST, HP)
  - Unify safety-and-soundness regulation and supervision of commercial banks and thrifts in a single federal agency and eliminate the federal thrift charter (ST, HP)
  - Unify federal securities and derivative market regulation into one federal agency (ST, MP)
  - Establish an independent and accountable federal consumer protection agency (ST, MP)
  - Establish a federal office to promote greater regulatory uniformity in the insurance sector (MT, MP)
- Strengthen micro-prudential regulation and supervision:
  - Enhance capacity for group-wide oversight and conduct regular inter-agency horizontal assessments (MT, HP)
  - Boost timeliness and forcefulness of supervisory and regulatory interventions (MT, HP)
  - Strengthen channels for cooperation within and among federal banking agencies, market regulators, and the states (MT, HP)
  - Enhance enforcement and oversight capacities and re-examine capital rules and other prudential requirements (ST, HP)
  - Implement recommendations to enhance investor protection and improve CFTC-SEC cooperation (MT, HP)
- Securities and derivative markets:
  - Complete consolidation of equity and equity option market surveillance into a single entity (ST, MP)
  - Promote standardization of OTC derivatives, increase exchange trading and multilateral clearing, and require proper collateralization (MT, MP)
  - Improve transparency of OTC derivative and securities markets by requiring timely reporting of transactions (MT, MP)
- Address shadow banking and short-term funding markets:
  - Discourage use of deposit-like instruments outside the formal banking sector and ensure appropriate liquidity management (ST, HP)
  - Set minimum haircuts for repo transactions and address incentives for repo clearing banks (ST, HP)
  - Require money market funds to make real-time disclosures of their actual net asset values (MT, MP)
- Strengthen oversight of market infrastructure:
  - Allow systemic payment, clearing, and settlement infrastructures to have accounts at the Fed and emergency access to Fed liquidity (ST, HP)
  - Increase frequency of stress testing for clearing and settlement infrastructures from monthly to weekly (ST, MP)
- Enhance crisis management, resolution, and systemic liquidity arrangements:
  - Extend FDIC special powers to enable receivership or conservatorship of BHCs and systemically important financial firms (ST, HP)
  - Review funding arrangements for the Deposit Insurance Fund and increase its size (MT, MP)
  - Implement “living will” requirements for large and complex financial groups (MT, HP)
  - Consider widening counterparties and collateral for open market operations and articulate policies for Fed lending to nonbank financial firms (MT, HP)
  - Discourage size and complexity by subjecting systemic financial institutions to more stringent prudential requirements (ST, HP)
  - Provide regulators authority to take pre-emptive actions when vulnerabilities build at potentially systemic financial firms (ST, HP)
  - Reform the housing GSEs, possibly by privatizing their retained asset portfolios and re-assigning social objectives/system support to an explicitly guaranteed public utility (MT, HP)

### Financial sector healing and risks (selected indicators)
- Problem loans to total loans and leases (FDIC-insured institutions):
  - 2009: 2.2
  - 2010: 3.9
  - 2011: 3.5
- Nonperforming assets to assets (FDIC-insured commercial banks only):
  - 2009: 1.8
  - 2010: 3.4
- Total capital to risk-weighted assets (SCAP institutions):
  - 2006: 13.2
  - 2007: 12.9
  - 2008: 13.0
  - 2009: 12.8
  - 2010: 12.8
  - 2011: 14.3
  - Latest: 15.3

### Key messages and vulnerabilities highlighted
- The recovery has been slow relative to the size of the contraction, with output below the pre-crisis trend and unemployment much higher than peers.
- Real estate remains under stress: residential investment and housing starts are depressed; shadow inventory and record foreclosure levels pose ongoing downside risks to housing activity.
- Households have been deleveraging—household liabilities and delinquent loans remain elevated, and household net worth has only had a bumpy recovery, weighing on consumption.
- Macro policy levers are strained: large federal deficits and rising government debt highlight the need for fiscal consolidation and addressing long-term entitlement spending pressures.
- Financial stability: while equity markets have recovered and major banks appear highly capitalized, credit quality and securitization activity remain weak and pose medium-term risks.
- External: current account deficits are projected to widen slightly from crisis lows, partly due to a rebound in import volumes; the U.S. IIP remains stronger than cumulative current account deficits suggest.

*Source: UNITED STATES—STAFF REPORT FOR THE 2011 ARTICLE IV CONSULTATION (selected tables, figures, and recommendations).*

### Annex I. United States: Fund Relations

### Annex I. United States: Fund Relations (As of May 31, 2011)

### I. Membership and Quota
- Joined: 12/27/45; Article VIII
- Quota (SDR Million): 42,122.40 (100.00 percent)
- Fund holdings of currency: 28,600.24 (67.90 percent)
- Reserve position in Fund: 13,520.00 (32.10 percent)
- New Arrangements to Borrow: 2,384.80 (SDR Million)

### III. SDR Department
- Net cumulative allocation (SDR Million): 35,315.68 (100.00 percent)
- Holdings (SDR Million): 35,697.88 (101.08 percent)

### IV–VI. Lending, Financial Arrangements, Projected Obligations
- Outstanding Purchases and Loans: None
- Financial Arrangements: None
- Projected Obligations to Fund: None

### VII. Exchange Rate Arrangements
- The exchange rate of the U.S. dollar floats independently and is determined freely in the foreign exchange market.

### VIII. Payments Restrictions and Sanctions
- The United States accepted Article VIII and maintains an exchange system free of restrictions and multiple currency practices except limited restrictions on certain payments and transfers imposed for security reasons.
- The United States administers approximately 30 economic sanctions programs restricting certain payments and transfers for transactions against particular foreign governments, entities, and individuals.
- Examples of sanctions programs cited: Burma, Cuba, Iran, North Korea, Sudan; continued blocking of certain previously frozen assets of the former Yugoslavia.
- Several “list-based” programs affect only members of certain government regimes and other individuals/groups determined to threaten U.S. foreign policy or economy. Examples: Côte d’Ivoire, Liberia, Somalia, Syria, Western Balkans, Zimbabwe.
- Similar list-based sanctions programs are implemented against narcotics traffickers; terrorism-related governments, entities, and individuals; and proliferators of weapons of mass destruction.

### IX. Article IV Consultation (2010–2011)
- 2010 Article IV consultation concluded July 2010; Staff Report published as IMF Country Report No. 10/249.
- FSAP missions: October 14–November 3, 2009 and February 17–March 12, 2010.
- FSSA discussed at the board on July 26, 2010 together with the 2010 Article IV Consultation.
- 2011 Article IV discussions: May 27–June 27, 2011.
  - Concluding meetings: Chairman Bernanke (June 23) and Treasury Secretary Geithner (June 27).
  - Acting Managing Director Mr. Lipsky and WHD Director Mr. Eyzaguirre participated in concluding meetings.
  - Press conference on consultation: June 29, 2011.
  - Team composition (at different times): Rodrigo Valdés (head), Gian Maria Milesi-Ferretti, Charles Kramer, Marcello Estevao, Oya Celasun, Nicoletta Batini, Martin Sommer, Evridiki Tsounta, Grace Bin Li, Geoffrey Keim (all WHD); Sally Chen (SPR); Francesco Columba and John Kiff (MCM). Contributions from Ranil Salgado, Nagwa Riad, Mika Saito (SPR) on trade policy; Steve Dawe (LEG) on AML/CFT issues. USA Spillovers team members attended some meetings. Ms. Lundsager (Executive Director) and Mr. Lindquist (Advisor) attended some meetings.
- Outreach included discussions with the private sector and think tanks.
- Publication: Unless an objection from U.S. authorities is received prior to conclusion of Board consideration, the document will be published.

*Italic: Statement by the IMF Staff Representative on the United States — July 21, 2011*  

### Staff Representative Note — Key Near-Term Developments (since mid-June)
- Incoming data point to downside risks to the staff’s near term forecast.
- Recent indicators: marked slowdown in growth of employment, aggregate labor income, and consumption; weaker consumer confidence.
- GDP growth in Q2 2011 tracking between 1.5 and 2 percent (annualized rate), below staff WEO projection of 2.6 percent.
- Twelve month core consumer price inflation: 1.6 percent in June.
- Headline consumer price inflation: around 3.5 percent.
- Federal debt ceiling negotiations ongoing; both party leaders committed to lifting the ceiling before August 2 deadline but lack basic political agreement on medium-term fiscal consolidation framework.
- Ratings actions and prospects:
  - Moody’s placed U.S. sovereign credit rating on review for downgrade.
  - Standard and Poor’s indicated a more than 50 percent likelihood of downgrade over the next three months given lack of consensus on medium-term fiscal consolidation framework.
- Market reaction so far: 10-year Treasury yield trading below 3 percent; CDS spreads broadly stable.
- Warning: Failing to raise the debt ceiling on time would have disastrous consequences for U.S. and global economy.

### Public Information Notice (PIN) No. 11/97 — Executive Board Conclusions (July 21, 2011)
- The Executive Board concluded the 2011 Article IV consultation with the United States. The consultation documents include a report analyzing spillovers from U.S. policies to the rest of the world.

Background observations from the PIN
- Recovery context:
  - U.S. economy recovering from its worst financial crisis since the Great Depression, aided by supportive macroeconomic policies.
  - Monetary policy highly accommodative: policy rates near zero and significantly expanded Federal Reserve balance sheet.
  - Fiscal policy: sizable stimulus to demand over 2009–2010; fiscal impulse for current fiscal year likely about zero.
  - Financial system strengthening, though lending conditions remain tight for some segments.
  - Household balance-sheet repair continuing amid declining house prices and high unemployment, weighing on consumption; construction remains depressed.
  - Corporate spending and hiring relatively weak despite record-high profit growth and easy financing for large firms.
  - GDP growth slowed from 2¾ percent (saar) in second half of 2010 to just under 2 percent (saar) in first half of 2011, reflecting higher oil prices and transient factors.
  - Current account deficit broadly sideways as higher oil prices offset strong external demand and dollar depreciation.
  - Outlook: continued albeit modest growth; economic slack remains large; inflation pressures likely contained.
  - Risks: elevated and tilted to downside, especially from housing market and possible spillovers from European sovereign crisis.

Policy context and recommendations summarized by Executive Directors
- Fiscal policy:
  - Placing public debt on a sustainable path is critical, with positive spillovers to other countries.
  - Welcomed administration objective to stabilize the debt ratio by mid-decade and gradually reduce it afterward.
  - Highlighted urgency of raising federal debt ceiling and agreeing on specifics of a comprehensive medium-term consolidation plan.
  - Recommended fiscal adjustment start in FY2012 to guard against disruptive loss in fiscal credibility.
  - Strategy should include entitlement reforms (including additional savings in health care) and revenue increases (including by reducing tax expenditures).
  - Welcomed proposals for multi-year expenditure caps on non-security discretionary spending and a “failsafe” mechanism to trigger automatic actions against deficit overruns.
- Monetary policy:
  - Given subdued inflation and resource underutilization, accommodative monetary policy likely appropriate for quite some time.
  - Called for vigilance on inflation and decisive policy response when appropriate.
  - When exit warranted, recommended gradual reduction of asset holdings accompanied by clear communication.
- Housing and labor markets:
  - Further efforts needed to address problems in housing and labor markets.
  - Measures to mitigate distressed sales and facilitate loan modifications would help stabilize house prices.
  - Reform of government-sponsored enterprises should be accelerated.
  - Encouraged re-examination of active labor market programs including job training and education.
- Financial sector reform:
  - Commended progress in repairing and reforming financial sector; implementation of FSAP recommendations and establishment of Financial Stability Oversight Council.
  - Encouraged prompt allocation of appropriate resources to fund improvements in regulation and supervision; resist pressures to water down legislation.
  - Emphasized priority of strengthening crisis prevention framework for systemically important financial institutions and international coordination.
  - Commended U.S. engagement in fostering international coordination on financial regulatory reforms.
- Global spillovers:
  - U.S. policies have uniquely large spillovers mainly through financial linkages; trade channel spillovers also relevant.
  - Important U.S. contributions to global growth and stability: (i) raising domestic savings, particularly through fiscal consolidation; (ii) strengthening financial sector regulation and supervision.
  - Some Directors cautioned that extraordinarily low U.S. interest rates may have encouraged excessive risk-taking, affected cross-border capital flows, and added to global inflationary pressures.
  - Potential risk of capital flow reversals from eventual U.S. monetary exit; emphasized importance of policy communication.

### Annex II. Statistical Issues
- Comprehensive economic data available on a timely basis.
- Quality, coverage, periodicity, and timeliness of U.S. economic data adequate for surveillance.
- Coverage of international capital flows in external sector statistics improved with June 2007 releases of BOP and IIP data on financial derivatives.
- The United States subscribes to the Special Data Dissemination Standard (SDDS); metadata posted on the Dissemination Standard Bulletin Board (DSBB).

United States: Table of Common Indicators Required for Surveillance (As of June 28, 2011)
- Exchange rates: latest observation June 24; Date received June 27; Frequency of data D; Frequency of reporting W; Frequency of publication W.
- International reserve assets and reserve liabilities of the monetary authorities: latest observation June 17; Date received June 27; Frequency of data W; Frequency of reporting W; Frequency of publication W.
- Reserve/base money: latest observation June 15; Date received June 23; Frequency of data B; Frequency of reporting W; Frequency of publication W.
- Broad money: latest observation June 13; Date received June 23; Frequency of data W; Frequency of reporting W; Frequency of publication W.
- Central bank balance sheet: latest observation June 22; Date received June 23; Frequency of data W; Frequency of reporting W; Frequency of publication W.
- Interest rates: latest observation same day; Date received same day; Frequency of data D; Frequency of reporting D; Frequency of publication D.
- Consumer price index: latest observation May 2011; Date received June 15; Frequency of data M; Frequency of reporting M; Frequency of publication M.
- Revenue, expenditure, balance and composition of financing—general government: latest observation 2011 Q1; Date received June 24; Frequency of data Q; Frequency of reporting Q; Frequency of publication Q.
- Revenue, expenditure, balance and composition of financing—central government: latest observation May 2011; Date received June 10; Frequency of data M; Frequency of reporting M; Frequency of publication M.
- Stocks of central government and central government-guaranteed debt: latest observation May 2011; Date received June 6; Frequency of data M; Frequency of reporting M; Frequency of publication M.
- External current account balance: latest observation 2011 Q1; Date received June 16; Frequency of data Q; Frequency of reporting Q; Frequency of publication Q.
- Exports and imports of goods and services: latest observation Apr. 2011; Date received June 9; Frequency of data M; Frequency of reporting M; Frequency of publication M.
- GDP/GNP (3rd release): latest observation 2011 Q1; Date received June 24; Frequency of data Q; Frequency of reporting M; Frequency of publication M.
- Gross External Debt: latest observation 2011 Q1; Date received June 9; Frequency of data Q; Frequency of reporting Q; Frequency of publication Q.
- International Investment Position: latest observation 2010; Date received June 28; Frequency of data A; Frequency of reporting A; Frequency of publication A.

Notes included in table:
- Frequencies: Daily (D), Weekly (W), Biweekly (B), Monthly (M), Quarterly (Q), Annually (A).
- Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.
- Interest rates include market-based and officially-determined rates.
- Financing includes foreign, domestic bank, and domestic nonbank financing.
- General government consists of central and state and local governments.
- International Investment Position includes external gross financial asset and liability positions vis-à-vis nonresidents.

### Selected Economic Indicators (annual change in percent, unless otherwise indicated) — Projections included
Key historical and projected figures
- Real GDP: 2006 2.7; 2007 1.9; 2008 0.0; 2009 -2.6; 2010 2.9; 2011 2.5; 2012 2.7
- Net exports (contribution to real GDP growth, percentage points): 2006 -0.1; 2007 0.6; 2008 1.2; 2009 1.3; 2010 -0.4; 2011 0.4; 2012 0.3
- Total domestic demand: 2006 2.6; 2007 1.3; 2008 -1.1; 2009 -3.6; 2010 3.2; 2011 2.0; 2012 2.2
- Final domestic demand: 2006 2.5; 2007 1.5; 2008 -0.6; 2009 -3.1; 2010 1.9; 2011 2.0; 2012 2.1
- Private final consumption: 2006 2.9; 2007 2.4; 2008 -0.3; 2009 -1.2; 2010 1.7; 2011 2.5; 2012 2.0
- Public consumption expenditure: 2006 1.0; 2007 1.3; 2008 2.5; 2009 1.9; 2010 0.9; 2011 -1.7; 2012 -1.0
- Gross fixed domestic investment: 2006 2.5; 2007 -1.2; 2008 -4.5; 2009 -14.8; 2010 3.3; 2011 4.0; 2012 6.0
- Private fixed investment: 2006 2.3; 2007 -1.8; 2008 -6.4; 2009 -18.3; 2010 3.9; 2011 5.3; 2012 7.5
- Residential structures: 2006 -7.3; 2007 -18.7; 2008 -24.0; 2009 -22.9; 2010 -3.0; 2011 -3.4; 2012 6.4
- Public fixed investment: 2006 3.3; 2007 1.7; 2008 4.3; 2009 0.2; 2010 1.3; 2011 -0.6; 2012 0.7
- Change in private inventories (contribution to real GDP growth): 2006 0.1; 2007 -0.2; 2008 -0.5; 2009 -0.7; 2010 1.4; 2011 0.1; 2012 0.1
- GDP in current prices: 2006 6.0; 2007 4.9; 2008 2.2; 2009 -1.7; 2010 3.8; 2011 4.0; 2012 3.9

Employment and inflation
- Unemployment rate: 2006 4.6; 2007 4.6; 2008 5.8; 2009 9.3; 2010 9.6; 2011 8.9; 2012 8.4
- CPI inflation: 2006 3.2; 2007 2.9; 2008 3.8; 2009 -0.3; 2010 1.6; 2011 2.8; 2012 1.6
- GDP deflator: 2006 3.3; 2007 2.9; 2008 2.2; 2009 0.9; 2010 1.0; 2011 1.4; 2012 1.2

Government finances
- Federal balance (percent of GDP, fiscal years): 2006 -1.9; 2007 -1.2; 2008 -3.2; 2009 -11.4; 2010 -9.6; 2011 -9.3; 2012 -7.6
- Debt held by the public (percent of GDP): 2006 36.5; 2007 36.2; 2008 40.3; 2009 53.5; 2010 62.1; 2011 70.2; 2012 74.6
- General government net lending (percent of GDP, GFSM 2001, calendar years): 2006 -2.0; 2007 -2.7; 2008 -6.5; 2009 -12.7; 2010 -10.3; 2011 -9.9; 2012 -7.8
- Structural balance (percent of potential nominal GDP): 2006 -2.0; 2007 -2.2; 2008 -4.6; 2009 -6.8; 2010 -7.2; 2011 -7.2; 2012 -5.8
- Gross debt (percent of GDP): 2006 61.0; 2007 62.2; 2008 71.2; 2009 84.2; 2010 93.5; 2011 99.0; 2012 103.0

Interest rates (percent)
- Three-month Treasury bill rate: 2006 4.8; 2007 4.5; 2008 1.4; 2009 0.2; 2010 0.1; 2011 0.2; 2012 0.4
- Ten-year government bond rate: 2006 4.8; 2007 4.6; 2008 3.7; 2009 3.3; 2010 3.2; 2011 3.5; 2012 4.4

Balance of payments
- Current account balance (billions of dollars): 2006 -803; 2007 -718; 2008 -669; 2009 -378; 2010 -470; 2011 -489; 2012 -410
- Current account balance (percent of GDP): 2006 -6.0; 2007 -5.1; 2008 -4.7; 2009 -2.7; 2010 -3.2; 2011 -3.2; 2012 -2.6
- Merchandise trade balance (billions of dollars): 2006 -839; 2007 -823; 2008 -835; 2009 -507; 2010 -647; 2011 -703; 2012 -702
- Merchandise trade balance (percent of GDP): 2006 -6.3; 2007 -5.9; 2008 -5.8; 2009 -3.6; 2010 -4.4; 2011 -4.6; 2012 -4.4
- Balance on invisibles (billions of dollars): 2006 37; 2007 105; 2008 166; 2009 129; 2010 177; 2011 214; 2012 293
- Balance on invisibles (percent of GDP): 2006 0.3; 2007 0.7; 2008 1.2; 2009 0.9; 2010 1.2; 2011 1.4; 2012 1.8

Saving and investment (percent of GDP)
- Gross national saving: 2006 16.2; 2007 14.3; 2008 12.4; 2009 10.9; 2010 11.6; 2011 12.3; 2012 14.1
- Gross domestic investment: 2006 20.5; 2007 19.6; 2008 18.0; 2009 14.8; 2010 15.9; 2011 16.1; 2012 16.7

Sources: Haver Analytics and IMF staff estimates.

*Italic: Annex I. United States: Fund Relations (As of May 31, 2011) — IMF country material compiled in the referenced document.*

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