## _cr16226 - 4.9 percent and household net worth is close to pre-crisis peaks. Nonetheless, the economy has

## Source details

**Canonical URL:** [_cr16226 - 4.9 percent and household net worth is close to pre-crisis peaks. Nonetheless, the economy has](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16226.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16226.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16226.pdf.json)

---

### Outlook and Near-Term Risks
- Recent performance and drivers
  - Temporary growth dip in the last two quarters driven by contraction in energy sector investment; a strong dollar and weak global demand weighing on net exports; weak non-energy, non-residential investment; slower consumer demand.
  - Real household disposable income is growing at 3 percent.
  - Housing market growing "at a healthy clip"; household net worth is close to pre-crisis peaks.
  - High frequency indicators point to activity reaccelerating in the second quarter.
- Growth projections
  - Economy expected to grow at 2.2 percent in 2016 and 2.5 percent in 2017, above potential.
  - Growth projected to steadily decline to 2 percent over the medium term.
- Labor market and inflation dynamics
  - Unemployment rate has fallen to 4.7 percent.
  - Remaining labor market gap should close over the 2016–17 period.
  - Inflation subdued; wage indicators show only modest acceleration.
  - As the output gap closes, PCE inflation expected to slowly and moderately rise above 2 percent in 2017–19, before returning to the Federal Reserve’s medium-term target of 2 percent.
- Risks
  - Downside risks: uncertainty from the U.K. referendum outcome; continued financial market volatility; further appreciation of the U.S. dollar.
  - Upside risks from oil: delayed effect on consumption and a lessening drag from oil-related investment.
  - Complex downside risk: potential growth may be lower than estimated and the output gap smaller than previously estimated, leading to capacity constraints, slower growth, domestic inflationary pressures, and negative global spillovers.

### Executive Board Assessment and High-Level Views
- Directors' assessment
  - Welcomed continued recovery supported by strong fundamentals and supportive macroeconomic policies.
  - Noted important downside risks and uncertainties: slower potential growth, a stronger U.S. dollar beyond fundamentals, and sustained investor risk aversion after the U.K. referendum.
  - Highlighted longstanding supply-side issues: low productivity growth, falling labor force participation, rising poverty, and wealth inequality.
- Monetary policy guidance
  - Pace of interest rate normalization should remain data-dependent and proceed cautiously along a gradual upward path.
  - Some merit seen in accepting temporary overshooting of the medium-term inflation target until expansion solidly established; many Directors worried about de-anchoring inflation expectations and eroding credibility.
  - Emphasized close monitoring of domestic and global developments and maintaining clear communication on interest rate adjustment.
- Fiscal and institutional guidance
  - Near-term fiscal policy appropriately supports growth and job creation; durable institutional solutions needed to enhance the budget process and minimize fiscal uncertainties.
  - Urged calibration of a credible medium-term consolidation plan to guide fiscal policy toward debt sustainability.
- Structural and social policy priorities
  - Broad measures urged to tackle longer-term challenges, including boosting federal infrastructure spending; reforming health care and pension systems; agreement on skill-based immigration reform; expanding tax credits to low-income households (pro-poor policies); raising the federal minimum wage; expanding paid-family leave and childcare assistance.
  - Complementary measures: comprehensive reform of the U.S. corporate income taxation and further progress on trade integration.
- Financial sector supervision and reform
  - Noted strengthened banking system but flagged pockets of vulnerabilities in asset management and insurance industries.
  - Recommended continued implementation of the 2015 Financial Sector Assessment Program recommendations and completion of regulatory reforms under the Dodd-Frank Act.
  - Recommended placing the insurance sector under consolidated national regulation and supervision, improved data collection and reporting in the nonbank sector, strengthened beneficial ownership requirements, and dialogue and capacity building on correspondent banking relationship withdrawals.

### Policy Strategies and Recommendations
- Monetary policy
  - Federal Reserve should remain data dependent.
  - Proceed along a very gradual upward path for the fed funds rate, mindful of global disinflationary trends and confirming wage and price inflation momentum.
  - Accept some modest, temporary overshooting of the Federal Reserve’s inflation goal to allow inflation to approach the 2 percent medium-term target from above as insurance against disinflationary risks and policy reversal.
- Fiscal policy
  - Near-term fiscal stance is supportive; demographic trends and rising interest rates will widen deficits over the medium term.
  - Need a detailed medium-term fiscal consolidation plan to prevent renewed rise in public debt.
    - Target: a medium-term federal government primary surplus of about 1 percent of GDP (a general government primary surplus of about ¾ percent of GDP).
  - Measures to boost growth and tackle poverty requiring fiscal resources should be funded from new revenues or reallocation of spending and fit within a deficit path that ensures a steady decline in the public debt-to-GDP ratio.
  - Find institutional mechanisms to avoid political brinkmanship (debt ceiling, government shutdown).
- Structural and social policies
  - Build consensus for reforms to increase state and federal infrastructure investments; institute comprehensive, skills-based immigration reform; further expand the Earned Income Tax Credit and raise the federal minimum wage; upgrade social programs for the nonworking poor; deepen and improve family-friendly benefits; comprehensively reform the corporate income tax.
- Financial regulatory policy
  - Oppose broad efforts to dilute Dodd-Frank Act provisions.
  - Implement FSAP recommendations and continue strengthening oversight of nonbank, asset management, and insurance sectors.

### Key Statistics and Selected Projections (as reported)
- Real GDP: 2.4 (2015), 2.2 (2016), 2.5 (2017), 2.3 (2018), 2.0 (2019), 1.9 (2020), 2.0 (2021)
- Unemployment rate: 5.3 (2015), 4.9 (2016), 4.8 (2017), 4.6 (2018), 4.7 (2019), 4.9 (2020), 5.1 (2021)
- Labor force participation rate: 62.6 (2015), 62.8 (2016), 62.9 (2017), 62.7 (2018), 62.5 (2019), 62.3 (2020), 62.1 (2021)
- Potential GDP: 1.8 (2015), 1.9 (2016), 1.9 (2017), 1.9 (2018), 2.0 (2019), 2.0 (2020), 2.0 (2021)
- Output gap (% of potential GDP): -1.1 (2015), -0.8 (2016), -0.3 (2017), 0.2 (2018), 0.2 (2019), 0.1 (2020), 0.0 (2021)
- PCE Inflation (q4/q4): 0.5 (2015), 1.0 (2016), 2.2 (2017), 2.3 (2018), 2.1 (2019), 2.1 (2020), 2.0 (2021)
- Core PCE Inflation (q4/q4): 1.4 (2015), 1.8 (2016), 2.1 (2017), 2.2 (2018), 2.1 (2019), 2.1 (2020), 2.0 (2021)
- Fed funds rate: 0.1 (2015), 0.5 (2016), 1.0 (2017), 1.8 (2018), 2.6 (2019), 2.9 (2020), 2.9 (2021)
- Federal balance (% of GDP, fiscal years): -2.6 (2015), -3.0 (2016), -2.8 (2017), -2.5 (2018), -3.0 (2019), -3.2 (2020), -3.4 (2021)
- Debt held by the public (% of GDP): 73.6 (2015), 76.0 (2016), 76.0 (2017), 75.6 (2018), 75.9 (2019), 76.4 (2020), 77.0 (2021)
- Gross debt (% of GDP): 105.7 (2015), 107.9 (2016), 107.8 (2017), 107.4 (2018), 107.5 (2019), 107.7 (2020), 107.8 (2021)
- Current account balance (% of GDP): -2.6 (2015), -2.9 (2016), -3.5 (2017), -3.8 (2018), -4.0 (2019), -4.0 (2020), -4.1 (2021)
- Net international investment position (% of GDP): -41.0 (2015), -44.2 (2016), -47.9 (2017), -51.7 (2018), -55.8 (2019), -59.4 (2020), -63.0 (2021)
- Personal saving rate (% of disposable income): 5.1 (2015), 5.4 (2016), 5.1 (2017), 4.7 (2018), 4.4 (2019), 4.5 (2020), 4.6 (2021)
- Private investment rate (% of GDP): 16.8 (2015), 16.7 (2016), 17.1 (2017), 17.3 (2018), 17.3 (2019), 17.3 (2020), 17.4 (2021)

### Consumption and the Oil Dividend (Box 1) — main findings
- Forecasts and outlook
  - Real GDP growth forecast: 2.2 percent in 2016 and 2.5 percent in 2017.
  - Output gap: estimated at 1 percent of potential GDP in 2015; expected to close by end-2017.
  - PCE inflation: expected to slowly rise above 2 percent in 2017–19 before returning to the Federal Reserve’s medium-term target.
  - Personal saving rate: stands at 5.4 percent, up ½ percent since mid-2014.
  - Net financial inflows: about 2 percent of GDP in 2015.
  - NIIP: fell to -39 percent of GDP in 2015; staff baseline projects further deterioration by 10 percent of GDP over the next five years.
  - Change in the structural primary balance (general government): expected to be -½ and 0.1 percent of GDP in 2016 and 2017, respectively.
- Consumption response to lower oil prices
  - Oil dividend: Since November 2014, drop in oil prices provided a 1 percent of GDP windfall to U.S. households.
  - Consumption elasticity to energy price changes: pre-financial crisis ~3; post-financial crisis 0.4.
  - Stylized facts: lower oil prices no longer boost consumer confidence as pre-crisis; equity–oil correlation shifted from -0.3 pre-crisis to +0.6 in 2010–15; consumer credit rate effects muted.
  - Household balance sheets: stronger disposable incomes and oil dividend allowed higher saving and strengthened balance sheets; personal saving rate now well above levels predicted by historical patterns.
- External sector and exchange rate
  - U.S. dollar: 13 percent real appreciation since summer 2014 has weighed on manufacturing investment and net exports.
  - Assessment of dollar valuation: current level assessed to be overvalued by 10–20 percent.
  - Current account: deficit is around 1.5–2 percent of GDP larger than level implied by fundamentals; at current REER levels, current account deficit expected to rise above 4 percent of GDP over the medium term.
- Energy sector investment and risks
  - Oil-sector investment cuts: oil companies curtailed investment by about 40 percent in 2015, subtracting 0.4 percent from GDP growth; in 2016, energy investment expected to fall by another 30 percent, subtracting 0.2 percent from growth.
  - Risk asymmetry: downside further compression could lead to larger-than-expected falls in investment (small share of GDP); upside if oil prices sustain current levels and financing normalizes.
- Investment, consumption, and other growth risks
  - Non-oil investment expectations vs. data: shrinking output gap should support non-oil, non-residential investment; recent data show opposite—possible explanations include U.S. dollar strength, energy sector spillovers, or structural shift to less capital intensity.
  - Consumption effect: little apparent consumption stimulus to date; stronger household balance sheets could produce a belated consumption response.

### ACA, Labor and Distributional Issues
- ACA coverage and costs
  - Uninsured fell to 9.1 percent of the population in 2015; 28.8 million remain uninsured.
  - Remaining uninsured mainly low-income young adults and non-permanent immigrants, and those in states that did not expand Medicaid.
  - PCE health care inflation has risen, on average, by 1.4 percent per year over the past 5 years.
- Labor market effects
  - CBO estimates ACA would reduce hours worked by around 1.7 percent by 2025 (other studies show smaller effects).
  - Coverage extension to age 26 appears to have raised wages of young adults.
- Distributional and poverty impacts
  - Simulation analysis points to a 6 percent increase in the income equivalent for the lowest quintile.

### Financial Conditions, System Risks, and Policy Actions
- Financial conditions (early 2016)
  - Volatility in early 2016 did not detract from overall supportive financial conditions.
  - After excluding energy/mining stress, availability and cost of household financing remain very favorable.
- Banking system resilience
  - Tier 1 capital at 13 percent of RWA; RWA density at 71 percent.
  - System appears resilient to a range of extreme shocks; 2016 CCAR results to be released in June (exercise precluded updated assessment).
- Pockets of vulnerability
  - Credit quality concerns in auto lending, student loans, commercial real estate; energy and mining exposures likely to bear losses (relatively small share).
  - Compressed interest margins weigh on profitability and move intermediation to the nonbank sector.
  - Housing market policies and expanded FHA lending leading to looser underwriting standards—potential future mortgage credit quality deterioration.
- Unresolved FSAP issues
  - Data blind spots; lack of risk management requirements and stress testing for asset management; residual repo and money market fund vulnerabilities; complex institutional regulatory structure; housing finance system in limbo; incomplete understanding of interlinkages.
- Policy recommendations
  - Continue implementation of FSAP recommendations; strengthen nonbank oversight; place insurance sector under consolidated national regulation; improve data collection and reporting.

### Corporate Tax Reform (Box 6) — priorities and options
- Shortcomings of current system: too complex; marginal rate too high with narrow base; legislated exemptions; favors debt financing; incentivizes cross-border avoidance.
- Priorities for incremental reform
  - Reduce corporate income tax rate to 25 percent.
  - Broaden base by eliminating corporate tax expenditures including Section 199 deduction and repeal corporate AMT.
  - Align depreciation with economic depreciation; eliminate tax incentives for petroleum exploitation.
  - Limit interest deductions to 10–20 percent of EBITDA; adopt territorial system with a 15 percent country-by-country minimum rent tax on foreign earnings; tax existing un-repatriated foreign earnings at 25 percent with payments over 8 years.
- More fundamental reform
  - Transform to a rent tax over a longer horizon: general capital allowance for both debt and equity-financed investment; tax remaining rents at a lower marginal rate; normal returns taxed at investor level; partial crediting for foreign taxes paid.

### Financial Stability, Supervision, and Reform Implementation
- Authorities’ views and system leverage
  - Leverage on average does not appear high; risks manageable; supervisors watching concentration of leverage and deteriorating credit quality in parts of the system.
  - Authorities committed to resisting wholesale dilution of post-crisis reforms; future regulatory changes to be data- and evidence-driven under FSOC coordination.
- Nonbank risks and market structure
  - Liquidity and redemption risks in pooled investment vehicles; work underway to improve liquidity management, reporting, and limits on illiquid holdings.
  - Need for better data on cash treasury markets, securities lending, and repos; interagency working group on hedge fund risks.
  - SEC developing enhanced reporting, risk management, and leverage limits for asset managers.
- Insurance sector developments
  - Asset allocations shifting; average duration rising; liabilities with higher guarantees and early withdrawal features increasing lapse-induced liquidity risk (lapse rates between 4 and 7 percent).
  - State-level fragmented regulation remains; moves toward group supervision and federal coordination are partially implemented.
- Correspondent banking relationship withdrawals
  - Decline in CBRs though volumes may rise; drivers include business model realignment, compliance costs, and reputational risks.
  - Policy options: outreach, clarity of expectations, capacity building in recipient countries, carve-outs for privacy laws, pooling compliance resources, and pricing correspondent services to reflect compliance costs.

### Public Debt Sustainability Analysis — main findings
- Baseline trajectory and fiscal outlook
  - Federal public debt ratio doubled since 2007; Bipartisan Budget Acts partially reversed automatic cuts; Tax Act of 2015 extended many tax cuts.
  - Baseline projection: "Federal debt held by the public is projected to increase from 75 percent of GDP now to close to 82 percent of GDP in FY2025."
  - "General government gross debt exceeding 108 percent of GDP by FY2025."
  - Conclusion: U.S. public finances remain on an unsustainable trajectory without adjustment.
- Adjustment scenario and recommendation
  - 2015 general government primary balance: "-1½ percent of GDP."
  - Staff recommendation: aim for a medium-term general government primary surplus of about ¾ percent of GDP (a federal government surplus of about 1 percent of GDP).
- Interest rate outlook
  - Effective interest rate projected to rise to about 4¾ percent by 2025 (compared to average about 3½ percent over 2005–2015); real interest rates will become a major debt-creating flow over the medium-term.
- Stress-test sensitivity results (selected)
  - 200 bps increase in sovereign risk premium → debt ratio ~15 percentage points above baseline.
  - Real GDP one standard deviation below baseline → public debt increases by about 8 percentage points above baseline.
  - 1 percentage point slippage in planned consolidation over next two years → debt-to-GDP ratio of 110 percent in 2025.
  - Combined macro-fiscal shock → public debt ratio could reach 132 percent by end of 10-year horizon.

### Risk Assessment Matrix (selected risks and quantified impacts)
- Sharp asset price decline and decompression of credit spreads
  - Level of Concern: Medium; Likelihood: Medium.
  - Expected impact: "A persistent 1 percent decompression of credit spreads could subtract about ½ percent of GDP after two years."
- Surge in the US dollar
  - Level of Concern: High; Likelihood: Medium.
  - Expected impact: "A persistent 10% dollar appreciation reduces GDP by 0.5 percentage points in the first year and 0.5-0.8 percentage points in the second year, ceteris paribus."
- Persistently lower oil prices
  - Level of Concern: Medium; Likelihood: Low.
  - Expected impact: further declines likely small effects on aggregate growth; potential upsides if consumption effects kick in.
- Faster increases in interest rates
  - Level of Concern: Medium; Likelihood: Medium.
  - Expected impact: "A permanent 50 bps surprise increase in 10-year interest rates could subtract about ½ percent of GDP after two years."
- Slower U.S. potential growth
  - Level of Concern: Low; Likelihood: High.
  - Expected impact: "Greater inflationary pressures would lead to a steeper path for policy rates and create market volatility. Lower medium-term growth would worsen poverty, increase debt-GDP, and create negative global spillovers."
- British voters elect to leave the European Union
  - Level of Concern: High; Likelihood: Medium/Low.
  - Expected impact: likely increase in risk premia could strengthen U.S. dollar and lower Treasury yields with uncertain impact on U.S. economy.

### External Sector Assessment (Annex V) — key points
- NIIP declined from -18.7 percent of GDP in 2010 to -38.8 percent of GDP in 2015.
- Under staff baseline, NIIP projected to deteriorate by about 10 percentage points of GDP over the next five years.
- Gross assets and liabilities about 140 and 180 per cent of GDP, respectively.
- REER: indirect estimates suggest exchange rate overvalued by almost 20 percent in 2015; staff assesses 2015 average REER overvalued by 10-20 percent.
- Current account: narrowed to -2.6 percent of GDP in 2015; expected to rise moderately through the medium term; EBA model estimates cyclically-adjusted CA gap of 1.7 percent of GDP for 2015 though staff adjusts for shale oil discovery reducing gap by about ¼ percent of GDP.
- Net financial inflows: about 2 percent of GDP in 2015 (below pre-crisis ~5.0 percent of GDP).
- Policy recommendations: medium-term fiscal consolidation toward general government primary surplus of about ¾ percent of GDP; structural policies to raise productivity, increase labor force growth, and raise saving.

### Selected fiscal and policy measures enacted (context)
- Bipartisan Budget Act of 2015: suspended the debt ceiling until March 2017 and locked in appropriations for 2016 and 2017.
- Protecting Americans from Tax Hikes Act: lowered tax revenues by 3½ percent of GDP over the next 10 years; made permanent enhanced child tax credit, American Opportunity tax credit, improvements to EITC, and research and experimentation credit.
- Fixing America’s Surface Transportation Act: commits US$305 billion to surface transportation for next 4 years.

*Source: UNITED STATES STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION (IMF) — content as provided in the supplied document.*

### 4.9 percent and household net worth is close to pre-crisis peaks. Nonetheless, the economy has

### _cr16226 - 4.9 percent and household net worth is close to pre-crisis peaks. Nonetheless, the economy has

### Outlook and Near-Term Risks
- Recent performance and drivers
  - The economy experienced a temporary growth dip in the last two quarters driven by:
    - contraction in energy sector investment,
    - a strong dollar and weak global demand weighing on net exports,
    - weak non-energy, non-residential investment,
    - slower consumer demand.
  - Real household disposable income is growing at 3 percent.
  - Housing market is growing "at a healthy clip"; household net worth is close to pre-crisis peaks.
  - High frequency indicators point to activity reaccelerating in the second quarter.
- Growth projections
  - Economy is expected to grow at 2.2 percent in 2016 and 2.5 percent in 2017, which is above potential.
  - Growth is projected to steadily decline to 2 percent over the medium term.
- Labor market and inflation dynamics
  - Unemployment rate has fallen to 4.7 percent.
  - Remaining labor market gap should close over the 2016–17 period.
  - Inflation has remained subdued; wage indicators have shown only modest acceleration.
  - As the output gap closes, PCE inflation is expected to slowly and moderately rise above 2 percent in 2017–19, before returning to the Federal Reserve’s medium-term target of 2 percent.
- Risks
  - Downside risks are prominent, including:
    - uncertainty from the U.K. referendum outcome,
    - continued financial market volatility,
    - further appreciation of the U.S. dollar.
  - Upside risks from oil include a delayed effect on consumption and a lessening drag from oil-related investment.
  - A complex downside risk: potential growth may be lower than estimated and the output gap smaller than previously estimated, which could lead to capacity constraints, slower growth, domestic inflationary pressures, and negative global spillovers.

### Executive Board Assessment and High-Level Views
- Directors' assessment
  - Welcomed continued recovery, supported by strong fundamentals and supportive macroeconomic policies.
  - Noted important downside risks and uncertainties: slower potential growth, a stronger U.S. dollar beyond fundamentals, and sustained investor risk aversion after the U.K. referendum.
  - Highlighted longstanding supply-side issues: low productivity growth, falling labor force participation, rising poverty, and wealth inequality.
- Monetary policy guidance
  - Agreed the pace of interest rate normalization should remain data-dependent and proceed cautiously along a gradual upward path.
  - Some merit seen in accepting a temporary overshooting of the medium-term inflation target until expansion is solidly established, but many Directors worried about de-anchoring inflation expectations and eroding credibility.
  - Emphasized close monitoring of domestic and global developments and maintaining clear communication on interest rate adjustment.
- Fiscal and institutional guidance
  - Near-term fiscal policy appropriately supports growth and job creation, but durable institutional solutions are needed to enhance the budget process and minimize fiscal uncertainties.
  - Urged calibration of a credible medium-term consolidation plan to guide fiscal policy toward debt sustainability.
- Structural and social policy priorities
  - Broad measures urged to tackle longer-term challenges, including:
    - boosting federal infrastructure spending,
    - reforming health care and pension systems,
    - agreement on skill-based immigration reform,
    - expanding tax credits to low-income households (pro-poor policies),
    - raising the federal minimum wage,
    - expanding paid-family leave and childcare assistance.
  - Complementary measures to boost long-term growth: comprehensive reform of the U.S. corporate income taxation and further progress on trade integration.
- Financial sector supervision and reform
  - Noted strengthened banking system but flagged pockets of vulnerabilities in asset management and insurance industries.
  - Recommended continued implementation of the 2015 Financial Sector Assessment Program recommendations and completion of regulatory reforms under the Dodd-Frank Act.
  - Recommended close monitoring and placing the insurance sector under consolidated national regulation and supervision.
  - Supported improved data collection and reporting in the nonbank sector, strengthened beneficial ownership requirements, and maintaining dialogue and capacity building on correspondent banking relationship withdrawals.

### Policy Strategies and Recommendations
- Monetary policy
  - Federal Reserve should remain data dependent.
  - Proceed along a very gradual upward path for the fed funds rate, mindful of global disinflationary trends and confirming wage and price inflation momentum.
  - Accept some modest, temporary overshooting of the Federal Reserve’s inflation goal to allow inflation to approach the 2 percent medium-term target from above as insurance against disinflationary risks and policy reversal.
- Fiscal policy
  - Near-term fiscal stance is supportive, but demographic trends and rising interest rates will widen deficits over the medium term.
  - A detailed medium-term fiscal consolidation plan is needed to prevent renewed rise in public debt.
    - Target: a medium-term federal government primary surplus of about 1 percent of GDP (a general government primary surplus of about ¾ percent of GDP).
  - Measures to boost growth and tackle poverty requiring fiscal resources should be funded from new revenues or reallocation of spending and fit within a deficit path that ensures a steady decline in the public debt-to-GDP ratio.
  - Find institutional mechanisms to avoid political brinkmanship (debt ceiling, government shutdown).
- Structural and social policies
  - Build consensus for reforms to:
    - increase state and federal infrastructure investments,
    - institute comprehensive, skills-based immigration reform,
    - further expand the Earned Income Tax Credit and raise the federal minimum wage,
    - upgrade social programs for the nonworking poor,
    - deepen and improve family-friendly benefits,
    - comprehensively reform the corporate income tax.
- Financial regulatory policy
  - Oppose broad efforts to dilute Dodd-Frank Act provisions.
  - Implement FSAP recommendations and continue strengthening oversight of nonbank, asset management, and insurance sectors.

### Key Statistics and Selected Projections (as reported)
- Real GDP: 2.4 (2015), 2.2 (2016), 2.5 (2017), 2.3 (2018), 2.0 (2019), 1.9 (2020), 2.0 (2021)
- Unemployment rate: 5.3 (2015), 4.9 (2016), 4.8 (2017), 4.6 (2018), 4.7 (2019), 4.9 (2020), 5.1 (2021)
- Labor force participation rate: 62.6 (2015), 62.8 (2016), 62.9 (2017), 62.7 (2018), 62.5 (2019), 62.3 (2020), 62.1 (2021)
- Potential GDP: 1.8 (2015), 1.9 (2016), 1.9 (2017), 1.9 (2018), 2.0 (2019), 2.0 (2020), 2.0 (2021)
- Output gap (% of potential GDP): -1.1 (2015), -0.8 (2016), -0.3 (2017), 0.2 (2018), 0.2 (2019), 0.1 (2020), 0.0 (2021)
- PCE Inflation (q4/q4): 0.5 (2015), 1.0 (2016), 2.2 (2017), 2.3 (2018), 2.1 (2019), 2.1 (2020), 2.0 (2021)
- Core PCE Inflation (q4/q4): 1.4 (2015), 1.8 (2016), 2.1 (2017), 2.2 (2018), 2.1 (2019), 2.1 (2020), 2.0 (2021)
- Fed funds rate: 0.1 (2015), 0.5 (2016), 1.0 (2017), 1.8 (2018), 2.6 (2019), 2.9 (2020), 2.9 (2021)
- Federal balance (% of GDP, fiscal years): -2.6 (2015), -3.0 (2016), -2.8 (2017), -2.5 (2018), -3.0 (2019), -3.2 (2020), -3.4 (2021)
- Debt held by the public (% of GDP): 73.6 (2015), 76.0 (2016), 76.0 (2017), 75.6 (2018), 75.9 (2019), 76.4 (2020), 77.0 (2021)
- Gross debt (% of GDP): 105.7 (2015), 107.9 (2016), 107.8 (2017), 107.4 (2018), 107.5 (2019), 107.7 (2020), 107.8 (2021)
- Current account balance (% of GDP): -2.6 (2015), -2.9 (2016), -3.5 (2017), -3.8 (2018), -4.0 (2019), -4.0 (2020), -4.1 (2021)
- Net international investment position (% of GDP): -41.0 (2015), -44.2 (2016), -47.9 (2017), -51.7 (2018), -55.8 (2019), -59.4 (2020), -63.0 (2021)
- Personal saving rate (% of disposable income): 5.1 (2015), 5.4 (2016), 5.1 (2017), 4.7 (2018), 4.4 (2019), 4.5 (2020), 4.6 (2021)
- Private investment rate (% of GDP): 16.8 (2015), 16.7 (2016), 17.1 (2017), 17.3 (2018), 17.3 (2019), 17.3 (2020), 17.4 (2021)

### Longer-Term Structural Concerns
- Demographic and structural headwinds
  - Rising share of the labor force shifting into retirement.
  - Aging basic infrastructure.
  - Scanty productivity gains.
  - Labor markets and businesses appear less adept at reallocating human and physical capital.
- Distributional trends and social outcomes
  - Labor’s share of income is around 5 percent lower today than it was 15 years ago.
  - The middle class has shrunk to its smallest size in the last 30 years.
  - Income and wealth distribution are increasingly polarized; poverty has risen.
  - If unchecked, these forces will drag down potential and actual growth, diminish gains in living standards, and worsen poverty.

*Source: UNITED STATES STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION (IMF) — content as provided in the supplied document.*

### Box 1). Nevertheless, the oil dividend and

### Box 1. Consumption and the Oil Dividend

### Forecasts and Macroeconomic Outlook
- Real GDP growth forecast: 2.2 percent in 2016 and 2.5 percent in 2017.
- Output gap: estimated at 1 percent of potential GDP in 2015; expected to close by end-2017.
- PCE inflation: expected to slowly rise above 2 percent in 2017–19 before returning to the Federal Reserve’s medium-term target.
- Personal saving rate: stands at 5.4 percent, up ½ percent since mid-2014.
- Net financial inflows: about 2 percent of GDP in 2015.
- Net international investment position (NIIP): fell to -39 percent of GDP in 2015; under staff’s baseline outlook the NIIP would deteriorate by a further 10 percent of GDP over the next five years.
- Change in the structural primary balance (general government): expected to be -½ and 0.1 percent of GDP in 2016 and 2017, respectively.

### Box 1 — Consumption Response to Lower Oil Prices
- Oil dividend: Since November 2014, the drop in oil prices has provided a 1 percent of GDP windfall to U.S. households.
- Historical vs. recent elasticity of consumption to energy price changes:
  - Pre-financial crisis elasticity: around 3.
  - Post-financial crisis elasticity: 0.4.
  - Definition: Consumption elasticity is the percent change in consumption associated with a 1 percent increase in energy spending.
- Stylized facts linked to the muted consumption response:
  - Consumer confidence: Lower oil prices no longer appear to have the same positive impact on consumer confidence as pre-crisis; near-term effects on confidence now appear, if anything, to be negative.
  - Equity–oil correlation: shifted from -0.3 pre-crisis to +0.6 in 2010–15; associated wealth and confidence effects from rising equity valuations now working in the opposite direction.
  - Consumer credit rates: impact of oil prices on interest rates on consumer credit is more muted than in the 1970–80s; difficult to detect any reduction in credit costs from lower oil prices since the early-1990s.
- Household balance sheets: Strong growth in disposable incomes and the oil dividend have allowed households to increase saving and strengthen balance sheets; conditioning on the recovery in household net worth, the personal saving rate is now well above levels that would have been predicted by historical patterns.

### External Sector and Exchange Rate
- U.S. dollar: 13 percent real appreciation since summer 2014 has weighed on manufacturing investment and net exports.
- Assessment of dollar valuation: current level assessed to be overvalued by 10–20 percent.
- Current account: current account deficit is around 1.5–2 percent of GDP larger than the level implied by medium-term fundamentals and desirable policies; at current real exchange rate levels, the current account deficit is expected to rise above 4 percent of GDP over the medium term.
- Spillovers: A strengthening dollar would push the external position further from levels justified by fundamentals; continued depreciation would be an upside for growth and inflation.

### Energy Sector Investment and Risks
- Oil-sector investment cuts:
  - Oil companies curtailed investment by about 40 percent in 2015, subtracting 0.4 percent from GDP growth.
  - In 2016, energy investment expected to fall by another 30 percent, subtracting 0.2 percent from growth.
- Risk asymmetry:
  - Downside: Further compression of capital spending could lead to larger-than-expected falls in investment, though these would be small as a share of GDP.
  - Upside: If oil prices sustain current levels and financing conditions for the sector normalize, oil-related investment could resume, providing a modest upside to activity.

### Investment, Consumption, and Other Growth Risks
- Non-oil investment: Shrinking output gap and decent prospects for domestic demand should support non-oil, non-residential investment; however, recent data show such investment moving opposite to this expectation—possible explanations include U.S. dollar strength, industrial spillovers from the energy downturn, or a structural shift toward less physical capital intensity.
- Consumption effect: To date little apparent consumption stimulus from lower oil prices, but stronger household balance sheets (especially for lower income households) increase resilience and could lead to a belated consumption response, an unambiguous upside to growth.
- U.K. exit from the European Union: Staff estimates suggest modest direct impact on U.S. growth from a disruptive U.K. exit; principal channels would be higher global risk aversion, compression of U.S. sovereign yields, a rise in the U.S. dollar, and a sell-off in risk assets—broader and more negative effects are highly uncertain.
- Potential growth misjudgment: If potential growth and the degree of slack are over-estimated, the economy could hit capacity constraints and growth could settle well below 2 percent; a lower potential could cause unexpected near-term inflation acceleration, prompting more aggressive Fed tightening, dollar appreciation, and asset-price volatility.
- Inflation risks: Risks skewed toward lower inflation—further dollar strength would drag on imported inflation; global excess capacity in tradable goods could lead to prolonged declines in tradable goods prices; muted nominal wage pickup could further weigh on inflation.

### Box 2 — Drivers of the U.S. Dollar (Empirical Findings)
- Exchange-rate related factors considered:
  - Expected cumulative short-term rate differentials (captured by long-term rate differentials).
  - Foreign exchange risk premia (from Consensus Forecasts survey expectations).
  - Movements in the equilibrium real exchange rate (e.g., terms-of-trade changes).
- VAR results:
  - FX risk premia and 10-year interest rate differentials have a significant and persistent effect on exchange rates.
  - A global uncertainty shock (higher VIX) induces appreciation of safe-haven currencies; the U.S. dollar rises against all major bilaterals except the Yen.
  - Commodity currencies (e.g., Canadian dollar) are sensitive to oil price movements, including via foreign currency risk premia.

### Box 3 — U.S. Shale Oil Scenarios and Global Spillovers
- Scenario assumptions for U.S. shale production:
  - Baseline: rig count consistent with current medium-term WTI forecast in the WEO; assumes linear improvement in productivity.
  - Upside: similar rig count to baseline but with a quadratic upward trend for productivity per rig.
  - Downside: decreasing gains in productivity (concave trend) and lowers the estimated impact of WTI price on the rig count by one standard deviation.
- Production range by 2020: U.S. production could range from 3.5 to 8.4 million barrels per day depending on the scenario (baseline similar to EIA forecast).
- Global spillovers (G20 model):
  - Upside scenario: decline in global oil prices leads to an increase of global GDP of about 0.4 percent.
  - Winners in upside production scenario: India and Korea (large oil importers).
  - Losers in upside production scenario: Saudi Arabia and Russia (high oil dependence, limited trade links with the U.S.).
  - Canada and Mexico: despite oil price decline in the upside scenario, receive a marginally positive short-term GDP impact because of strong trade links with the U.S.; effects turn moderately negative by 2021.

### Fiscal Policy and Policy Measures
- Near-term fiscal stance: change in the structural primary balance of -½ and 0.1 percent of GDP in 2016 and 2017, respectively—mildly supportive of growth relative to 2014–15 fiscal contractions.
- Fiscal measures enacted:
  - Bipartisan Budget Act of 2015: suspended the debt ceiling until March 2017 and locked in appropriations for 2016 and 2017, avoiding a government shutdown risk.
  - Protecting Americans from Tax Hikes Act: lowered tax revenues by 3½ percent of GDP over the next 10 years; made permanent the enhanced child tax credit, the American Opportunity tax credit, improvements to the earned income tax credit, and the research and experimentation credit for corporations.
  - Fixing America’s Surface Transportation Act: commits US$305 billion to surface transportation for the next 4 years and provides planning stability for states on co-financed projects.

*Sources: BEA; FRB; Haver Analytics; IMF staff estimates*

### 8.      The Affordable Care Act (ACA) was the

### _cr16226 - 8.      The Affordable Care Act (ACA) was the

### ACA: Coverage and Costs
- Health insurance coverage has risen significantly, with the uninsured falling to 9.1 percent of the population in 2015.
- Despite the decline, 28.8 million people remain without insurance.
- The remaining uninsured are mainly low-income young adults and non-permanent immigrants, including those with incomes that are too high to qualify for Medicaid (in those 19 states that chose not to expand Medicaid to households that earn less than 133 percent of the federal poverty threshold) but too low to receive ACA insurance premium subsidies.
- Following passage of the ACA, health costs have been rising at a slower pace: PCE health care inflation has risen, on average, by 1.4 percent per year over the past 5 years.

### ACA: Labor Market Effects
- The impact of the ACA on labor supply remains unclear and subject to large uncertainties.
- The Congressional Budget Office estimates the ACA would reduce hours worked by around 1.7 percent by 2025 (although other empirical studies have smaller effects).
- The ACA requirement to maintain children on a parent’s insurance until they are 26 years old appears to have raised the wages of young adults.

### ACA: Distributional and Poverty Impacts
- Early evidence suggests the ACA has provided some support to those below, or close to, the poverty line.
- Simulation analysis points to a 6 percent increase in the income equivalent for the lowest quintile.

### Financial Conditions (early 2016 context)
- Volatility in financial markets in early 2016 did not detract from overall very supportive financial conditions for the real economy.
- After parsing out the effects of stress in energy and mining companies, availability and cost of financing for households—mortgage rates, auto loans, and the senior loan officer survey—remain very favorable.
- As risk-free rates trended downwards, investment grade yields of non-energy companies have generally been moving sideways.

### Financial System Risks and Resilience
- U.S. banking system continues to strengthen its capital position: Tier 1 capital is at 13 percent of risk weighted assets (RWA), with increasing RWA density (now at 71 percent).
- The system appears resilient to a range of extreme market and economic shocks.
- The results of the 2016 Comprehensive Capital Analysis and Review exercise will be released in June, precluding an updated assessment relative to the 2015 Article IV.
- Measures to bolster bank liquidity, and strengthen recovery and resolution, are being steadily implemented.

### Pockets of Vulnerability
- Credit quality concerns in auto lending, student loans, and commercial real estate lending.
- Energy and mining loan exposures are also likely to bear losses, though these are relatively small parts of the U.S. financial system.
- Compressed interest margins weigh on bank profitability and are causing intermediation to increasingly move to the nonbank sector, including mortgage origination and servicing being relocated to specialist non-banks.
- Such mortgages are predominantly being securitized by the government sponsored enterprises and meet the debt-to-income and underwriting requirements of the Qualified Mortgage standard.
- Housing market policies, including expanded lending by the Federal Housing Administration, are leading to looser underwriting standards which could, over time, worsen the credit quality of mortgages.

### Unresolved Financial Stability Issues (from 2015 FSAP)
- Many issues highlighted in the 2015 FSAP have not been addressed. These include:
  - data blind spots;
  - lack of risk management requirements and stress testing for the asset management industry;
  - residual vulnerabilities in repo markets and money market funds;
  - the complex institutional structure for financial regulation;
  - a housing finance system that remains in limbo;
  - an incomplete understanding by regulators of financial interlinkages.

### Other Financial Developments
- A large U.S. insurance company appealed its designation by the Financial Stability Oversight Council as a Systemically Important Financial Institution; a federal court ruled to rescind the designation and the Financial Stability Oversight Council is appealing that decision.
- Potential lack of market liquidity in a range of fixed income instruments, particularly under stress, remains a concern that could increase the risk of destabilizing forced asset sales or create volatility in market pricing.
- Banks’ balance sheet space for market-making activities has become tighter in the new regulatory environment; alternative market systems are still unable to provide a full offset.
- Buy-side institutions are adapting by arranging activities with an understanding that liquidity-under-stress will be lower.

### The Supply Side Challenges Ahead
- The U.S. faces a confluence of forces weighing on prospects for continued gains in economic well being: aging labor force, aging infrastructure, scanty productivity gains, and reduced ability of labor markets and businesses to reallocate human and physical capital.
- Secular trends in income:
  - labor’s share of income is around 5 percentage points lower today than it was 15 years ago;
  - the middle class has shrunk to its smallest size in the last 30 years;
  - income and wealth distribution are increasingly polarized;
  - poverty has risen.
- These trends coincide with a decline in potential growth (from above 3 percent in the early 2000s to below 2 percent today).

### Demographics and Fiscal Implications
- Demographics are an immutable headwind: the aging of the baby boom generation will cause a fall in the growth of the working age population and a steady decline in labor force participation.
- The labor force is projected to grow at just 0.5 percent per year over the next decade (significantly slower than the 0.9 percent growth of the past 25 years).
- Falling labor force growth and a higher dependency ratio will reduce potential growth and add to medium-term fiscal challenges.
- Aging-related spending is forecast to cause an inflexion point in the public debt GDP ratio starting in 2019.

### Productivity, Dynamism, and Business Formation
- Total factor productivity (TFP) growth has been close to zero in the past 5 years; labor productivity estimates show a similar decline.
- Contributing factors to slower productivity growth include a slower pace of innovation, decline in economic dynamism, reduced pace of new firm formation, rising firm concentration, falling labor market turnover, and the shift from manufacturing to services.
- Decline in labor market dynamism:
  - Over one-half of post-recession employment gains have been accounted for by the 55-and-over population.
  - Churning has trended downward for both men and women and is at historically low levels.
- Firm creation and destruction are below historic levels; business dynamism (birth, growth, exit) has declined, with a marked decline in firm startups and a decreasing role of young businesses.
- Factors reducing dynamism include shifts in the IT sector, increasing firm concentration, and rising barriers to entry.

### Labor Share and Income Distribution
- The labor share of income has seen a secular decline that began to accelerate in 2000.
- Factors include wage competition from abroad, compositional shift toward services (where labor share is lower), and a decline in labor share within manufacturing and industry (particularly for import-exposed sectors).
- Possible causes for the manufacturing decline in labor share: generalized decline in unionization rates, a shift of manufacturing activity to southern and western states that prohibit union security agreements, and off-shoring of more labor-intensive tasks within manufacturing and industry.

### Boxed Findings Highlighted in the Text
- Box 4 (The Decline of U.S. Dynamism):
  - Since the late 1980s, workers change jobs less frequently; job-to-job moves have fallen by 40 percent.
  - Firm entry and exit rates have been on a secular decline and have broadened to include innovative sectors.
  - Declining dynamism may have slowed allocation of talent to productive firms and suppressed productivity growth.
  - Potential explanations: rising legal and regulatory constraints, changes in corporate business models exploiting economies of scale, evolving social preferences reducing willingness to take employment risks.

- Box 5 (Polarization and Consumption):
  - Since the 1970s, real income of families in low to middle income brackets has stagnated while higher brackets accelerated since the late 1990s.
  - The middle class (50–150 percent of median income) has hollowed out, with movements tilted more toward lower income ranks since 2000.
  - The real net worth of groups earning less than two-thirds of the median income is now 20 percent below 1983 levels; average real net worth of those earning more than twice the median has doubled since 1983.
  - Staff estimates suggest rising polarization has lowered aggregate consumption by about 3½ percent since 1998 (equivalent to more than one year of consumption).

*International Monetary Fund — United States chapter excerpts*

### 18.      The re-profiling of the economic structure, coupled with skill-biased technological

### _cr16226 - 18.      The re-profiling of the economic structure, coupled with skill-biased technological

### Job polarization, income and wealth distribution
- Since the mid-1980s, semi-skilled jobs paying incomes around the national median have fallen; jobs have been created at the upper or lower ends of the occupational skill distribution ("job polarization").
- Earnings of workers remaining in the middle and lower segments of the skill distribution have stagnated or fallen, producing a "hollowing out" of the income distribution.
- The share of households earning between 50 and 150 percent of the median income has fallen from 58 to 46 percent over the past 45 years.
- A pronounced polarization of the wealth distribution has accompanied income polarization, affecting consumer behavior, human capital accumulation, and the housing market.

### Poverty trends and composition
- Current incidence: 1 in 7 Americans are living in poverty, including 1 in 5 children and 1 in 3 female-headed households.
- Around 40 percent of those in poverty are working.
- Poverty has been unusually persistent even as the economic expansion has matured; poverty levels today are higher across age cohorts and for both men and for women.
- All of the progress made in lowering poverty during the 1990s has been unwound.
- Contributing factors include: greater premium for skills, declining progressivity of the tax system, compositional changes in sectoral employment and educational attainment, and dislocation from the financial crisis.

### Near-term poverty alleviation and safety net policy recommendations
- Near-term measures recommended:
  - Make the earned income tax credit (EITC) more generous, including eligibility for workers without dependents, those under 25, and older workers not yet eligible for social security.
  - Raise the federal minimum wage.
  - Upgrade social programs to support the nonworking poor by simplifying/unifying safety-net programs, increasing generosity, learning from state-level diversity, and targeting federal payments toward specified outcomes.
- Longer-horizon human-capital measures:
  - Improve K-12 education and invest in early childhood education.
  - Subsidize healthcare and childcare for lower income families.
  - Expand needs-based support for tertiary and vocational education to reduce inter-generational persistence of poverty.

### Authorities’ views on poverty and labor supports
- Administration proposals and actions:
  - Raise the minimum wage and expand the EITC for workers without dependent children and workers aged 21–24 and 65–66.
  - President’s budget proposes high-quality preschool for lower income families, full day kindergarten in every school district, and expanded funding for programs supporting the neediest children.
  - Overtime regulations updated to US$ 913 per week salary threshold, extending coverage to 4.2 million lower income workers; threshold will be automatically updated every 3 years based on wage growth.
  - Officials favor reexamining the structure of safety net spending given declines in cash poverty alleviation program generosity.

### Labor force participation and family/demographic policy
- Falling labor force participation is partly due to aging, but policy can mitigate.
- Recommended policies to raise participation:
  - Adopt family-friendly benefits: means-tested childcare support and paid family leave in line with ILO conventions.
  - Rework disability insurance to provide incentives for beneficiaries to work part-time rather than exit the labor force.
  - Pursue skill-based immigration reform to change demographic trends, reduce the dependency ratio, and raise average human capital.
- Authorities’ views:
  - 2017 Budget proposes federal start-up grants to assist states introduce paid leave programs and six weeks paid administrative leave for federal employees for birth, adoption, or foster placement (current federal employees may draw six weeks sick leave and take twelve weeks unpaid leave).
  - Budget supports increasing childcare subsidies and raising the child and dependent care tax credit to a maximum amount of US$3,000 per child for families with children under age five.
  - Administration committed to comprehensive immigration reform and has taken executive actions to offer relief from deportation for parents of citizens or legal residents who have lived in the U.S. for more than five years.

### Productivity, infrastructure, education, vocational training, and trade policy
- Total factor productivity has slowed significantly since the late 1990s; this is a global trend.
- Policy levers to raise productivity:
  - Expanding infrastructure investment: public capital stock aging and declining as a share of GDP; estimated infrastructure investments could cost about 5–8 percent of GDP over the next 10 years and should be financed without an increase in the near-term fiscal deficit (i.e., by reallocating spending and raising revenues). Estimates suggest such expansion could boost potential growth by around ¼ percent.
  - Upgrade infrastructure technologies (high speed rail, ports, telecommunications) and seek innovative financing solutions for public and private investment.
  - K-12 education: prioritize early childhood education (including universal pre-K financing) and support STEM programs.
  - Vocational education: increase federal support for state-level training and expand industry–higher education partnerships for apprenticeships and vocational training.
  - Trade integration: pursue new trade agreements (example given: Trans Pacific Partnership (TPP)) to preserve level playing field in services and tradable services growth; resist all forms of protectionism.
- Transition costs from greater trade integration acknowledged; recommended mitigation for trade-affected workers through training, temporary income support, job search assistance, and existing trade adjustment assistance program.

### Authorities’ views on productivity, infrastructure, education, and trade
- Administration proposals and actions:
  - Proposed "surge" in infrastructure and clean energy investment funded through an excise on crude oil and a one-time 14 percent tax on unrepatriated corporate profits (as a transition to broader business tax reform).
  - Expanded grants and tax credits to increase access to college; proposal to make community college free for two years.
  - Research and experimentation tax credit made permanent.
  - Federal funding for job training increased; 75,000 additional individuals enrolled into federally-supported apprenticeship programs in the past two years.
  - Strong commitment to working with Congress to pass the TPP and resist financial and trade protectionism.
  - Officials noted value of examining productivity slowdown from an international perspective.

### Fiscal policy risks, medium-term outlook, and required consolidation
- Medium-term fiscal pressures:
  - Over the next decade healthcare and social security outlays expected to increase by 1¾ percent of GDP and interest spending will rise by 2 percent of GDP.
  - Federal debt forecast to begin rising in 2019 and exceed 80 percent of GDP by 2025.
- Recommended medium-term fiscal objective:
  - Target a medium-term federal government primary surplus of about 1 percent of GDP (a general government primary surplus of about ¾ percent of GDP) to put public debt on a downward path.
  - Policies to boost growth and tackle poverty should fit within this overall deficit envelope.
- Measures to avoid fiscal policy brinkmanship and improve institutions:
  - Replace the debt ceiling with a bipartisan agreement on a clear, simple medium-term fiscal objective with numerical goals for both debt and deficit.
  - Alternatively, introduce a legislative process to adjust the debt ceiling automatically consistent with broader budget agreements.
  - Build mechanisms to trigger automatic revenue or spending adjustments if congressionally approved targets are breached.
  - Consider shifting to a two-year budget cycle to divorce budget decisions from the electoral calendar.
- Authorities’ views:
  - Administration proposals on tax side: close personal income tax loopholes for "carried interest"; limit value of itemized deductions and other tax expenditures for higher income households; increase top tax rate on capital gains and dividends to 28 percent.
  - Proposed comprehensive, revenue-neutral business tax reform: reduce corporate tax rate to 28 percent; eliminate dozens of inefficient tax expenditures; impose a 19 percent minimum tax on foreign earnings paid currently without deferral; limits on excessive interest deductions by foreign companies.
  - Administration recognizes entitlement imbalances and has put forward measures that could be part of a "grand bargain" to strengthen solvency; notes progress from the Affordable Care Act in lowering the pace of health care cost increases.

### Specific reform areas and recommended measures
- Tax reform:
  - Comprehensive reform that removes exemptions, simplifies the system, and reduces statutory rates could raise real GDP by up to 1.6 percent over the next ten years (Joint Committee on Taxation estimate).
  - Consider a federal level VAT and a broad-based carbon tax (including increase in federal gas tax, which has been 18 cents per gallon since 1993).
  - For the personal income tax, make structure more progressive by capping itemized deductions, including mortgage interest, to lessen tax benefits for the most well off.
- Pension reform:
  - Raise the income ceiling for social security contributions.
  - Index benefits and contribution provisions to chained CPI.
  - Raise the retirement age.
  - Institute greater progressivity in benefit structure.
- Healthcare cost containment:
  - Improve coordination of services for chronic conditions, greater cost sharing, efficiency innovations (electronic health records, remote consultations, international outsourcing of diagnostics).
  - Change incentives away from remuneration per procedure toward payments for specified health outcomes.
  - Increase Medicare premiums to address public financing imbalances.

### Estimated fiscal impact of various policy options (cumulative primary deficit change, 2017–2025, expressed as a percent of average 2017–2025 GDP)
- Infrastructure (drawing on American Society of Civil Engineers): +5 to 8
- Extend EITC to childless and younger workers (JCT): +0.4
- Increased funding for education and job training (CBO): +0.5
- Healthcare:
  - 1% increase in payroll tax for Medicare Hospital Insurance (CBO): -3.4
  - Increase premiums for Parts B and D of Medicare (CBO): -1.4
  - Change cost sharing rules for Medicare / restrict Medigap insurance (CBO): -0.5
  - Manufacturers rebate for Medicare Part D drugs for low-income patients (CBO): -0.5
- Social Security:
  - Increase maximum taxable earnings for payroll tax to $180,000 in 2017; index maximum to chained CPI thereafter (CBO): -3.0
  - Indexing benefits to chained CPI (CBO): -0.8
  - Phased increase of full retirement age to 70 (CBO): -0.2
  - Extend the computation period for benefits by three years (CBO): -0.2
- Tax reform:
  - 1% increase in personal income tax rates for upper-income groups (JCT): -0.4
  - Eliminate fossil fuel preferences (JCT): -0.2
  - Replace CPI with chained CPI for personal income tax brackets (CBO): -0.6
  - Carbon tax (2015 Article IV report): -4 to -5
  - For each 1% broad based VAT (CBO): -2.4
  - For each 10 cents increase in federal gas tax and index for inflation (CBO): -0.5
- Immigration reform (CBO): -1.5

*Source: IMF staff summary of the provided chapter content.*

### Box 6. Reform of the U.S. Corporate Income Tax

### Box 6. Reform of the U.S. Corporate Income Tax

### The shortcomings
- Bipartisan acceptance that the U.S. system for taxing corporate income is broken.
- Current tax structure characteristics:
  - Too complex.
  - A marginal rate that is too high and with a narrow base.
  - Rife with legislated exemptions.
  - Favors debt financing.
  - Incentivizes a range of cross-border avoidance and tax planning mechanisms to lower U.S. tax liabilities.
- Negative implications for productivity and the global competitiveness of U.S. businesses.
- Political obstacles have prevented reform despite well-documented distortions and shortcomings.

### Priorities for incremental reform
- Reduce the corporate income tax rate to 25 percent.
- Broaden the CIT base by eliminating the bulk of corporate tax expenditures including the Section 199 deduction (for domestic production activities) and repeal the corporate alternative minimum tax.
- Align depreciation allowances with rates of economic depreciation.
- Eliminate tax incentives for petroleum exploitation, including publicly traded partnerships.
- Adopt the recommendations of Base Erosion and Profit Shifting Action 4 by limiting interest deductions to 10–20 percent of EBITDA for both domestic and foreign-owned firms to reduce income-stripping as well as debt bias.
- Adopt a territorial system by excluding dividends of foreign subsidiaries from U.S. taxation. On a going-forward basis, impose a 15 percent country-by-country minimum rent tax on the foreign earnings of U.S. corporations. Maintain the current system of crediting for foreign taxes paid.
- Tax the existing stock of un-repatriated foreign-sourced earnings at a rate of 25 percent, with payments spread over the next 8 years.

### More fundamental reform
- Transform the corporate tax system into a rent tax over a longer horizon:
  - Allow U.S. corporations a general capital allowance against earnings for both debt and equity-financed investment.
  - Tax the remaining rents at a lower marginal rate.
  - Normal returns to capital should be taxed at the investor level, including by removing the current tax exempt status for pension funds and endowments.
  - Partial crediting should remain for foreign taxes paid.

*Source: Box 6, "Reform of the U.S. Corporate Income Tax" (from the supplied IMF content).*

### 37.      Authorities’ views. Leverage in the system on average does not appear high and risks

### _cr16226 - 37.      Authorities’ views. Leverage in the system on average does not appear high and risks

### Financial stability assessment and authorities’ views
- Leverage in the system on average does not appear high and risks appear manageable.
- Supervisors were closely watching risks associated with the concentration of leverage and deteriorating credit quality in certain parts of the system.
- Authorities expressed a strong commitment to continue to strengthen efforts to monitor potential risks and emerging threats to financial stability.
- There is a risk that political support for post-crisis financial reform could ebb, creating danger that progress may stall or be rolled back; authorities were committed to resisting wholesale or broad-based efforts to dilute the provisions of the Dodd-Frank Act.
- Future regulatory changes will be data- and evidence-driven and involve broad collaboration among various regulators under the umbrella of the Financial Stability Oversight Council.

### Risks from pooled investment vehicles, market structure, and operational threats
- Recognized financial stability concerns from liquidity and redemption risks in pooled investment vehicles (particularly mutual funds that invest in less liquid assets).
- Ongoing work to:
  - Improve liquidity management practices, reporting and disclosure for mutual funds.
  - Impose limits on a fund’s ability to hold assets with very limited liquidity.
- Markets weathered early-year dislocations well, indicating adaptation by market participants.
- Steps being taken to better understand market structure and interactions:
  - Build a better database on cash treasury markets.
  - Enhance data collection and reporting on securities lending and repos.
  - Form an interagency working group to examine potential risks to financial stability from hedge fund activity.
- Shared concern that regulators do not have a complete picture of the risks being taken in the nonbank system.
- The Securities and Exchange Commission is developing proposed rules to enhance the regulatory framework over the U.S. asset management industry, including:
  - Enhanced reporting and risk management requirements.
  - Limits to leverage.
  - For registered investment companies and advisers—transition planning to address a potential major disruption in their business.
- Alignment of repo and triparty settlement has eliminated intraday credit risk, thereby completing the triparty repo reform.
- Increased concern on operational risks from a serious failure in cyber security protections; an interagency collaboration was underway to better understand and address these risks.

### Regulatory and supervisory reforms implemented
- Important gains made in strengthening financial oversight structure include:
  - Enhanced capital and liquidity requirements.
  - Better underwriting standards in the housing sector.
  - Greater transparency to mitigate counterparty risks.
  - Limits on proprietary trading.
- Dodd-Frank Act requirements stimulated supervisory intensity, with increased emphasis on banks’ capital planning, stress testing, and corporate governance.
- The Federal Reserve’s Comprehensive Capital Analysis and Review process proved particularly valuable.
- Further regulatory measures implemented or being implemented:
  - Liquidity risk requirements for money market and mutual funds.
  - Standardization of derivatives products and markets.
  - Measures that reduce banks’ medium term asset-liability mismatch (through the net stable funding ratio).
  - A framework for bank recovery and resolution (rules on living wills and bail-inable debt).
- These improvements need to be preserved despite political pressures to recalibrate or roll back reforms.

### Developments in the U.S. life insurance sector (Box 9)
- Assets:
  - Investment portfolios have shifted with a declining presence of mortgages and rising investments in direct lending, equity, mutual funds, and hedge fund investments.
  - Average duration has risen, increasing sensitivity to abrupt increases in interest rates (though a slow rise in rates would benefit the industry).
  - Difficulty in assessing change in credit, liquidity, and market risk over time given inability to have a clear portfolio view and correlations among asset classes.
- Liabilities:
  - Increased share of insurance products with higher guarantees or early withdrawal features.
  - Exposure has risen to lapse-induced liquidity risk (with lapse rates between 4 and 7 percent across large firms).
  - If liquidity shortages force asset liquidation in volatile markets, market liquidity risk borne by life insurers on the liability side has likely risen.
- Oversight and supervision:
  - Insurance supervision strengthened by bringing it under FSOC oversight and creating the Federal Insurance Office.
  - Regulatory system remains fragmented at the state level; Federal Reserve oversight of systemic insurance groups is still being developed.

### Withdrawal of correspondent banking relationships (paras 41–44; Box 10)
- Trends and implications:
  - Many globally active banks, including U.S. banks, have been scaling back correspondent banking relationships (CBRs).
  - While number of relationships has declined, indications that volume of correspondent activity continues to rise.
  - Prospective shifts in CBRs could impair cross-border financial intermediation (including remittances and trade finance), limit financial services to certain jurisdictions, and cause migration of customers/activities to areas with lower regulatory visibility.
- Multiple drivers for CBR withdrawal:
  - Realignment of bank business models due to changes in capital and liquidity rules, requirement for foreign banks to establish bank holding companies in the U.S., structural decline in profitability, and significant fixed compliance costs.
  - Increasing economic, financial and reputational risks tied to supervisory and criminal enforcement risks (money laundering, financing of terrorism, tax evasion, sanctions, narcotics proceeds).
  - Tighter post-crisis regulation and broader reporting requirements (including AML/CFT) that require investments in transaction monitoring, customer due diligence, and record maintenance.
  - Conflicts of regulations, such as data privacy constraints on cross-border information sharing that prevent adequate due diligence.
- Regulatory clarity and approach:
  - U.S. regulations are complex but appear clear and generally well understood by most global banks with sizeable U.S. footprints.
  - U.S. authorities have undertaken extensive outreach and education efforts, including publishing supervisory manuals, case law, implementing regulations, and outreach presentations.
  - Regulators emphasize a risk-based approach: they look for adequate systems to manage risks and prefer activities be maintained within the regulated financial system with appropriate controls.
  - Enforcement shows a proportional process from supervisory involvement to enforcement action; most cases are resolved with remedial measures; large fines involved egregious, widespread, repeated and systemic violations.
- Policy options recommended (Box 10):
  - U.S. regulators should continue investments in outreach, clarification of regulatory expectations, and building understanding of standards relating to AML/CFT, sanctions, tax issues, and narcotics-linked transactions.
  - The U.S. should continue efforts to assist recipient countries to build capacity.
  - Work with other jurisdictions to foster global and bilateral solutions to data privacy impediments, e.g., structuring carve-outs to local privacy laws to allow limited information sharing.
  - Full compliance with international standards on AML/CFT and tax information sharing by other jurisdictions and banks will help mitigate risks U.S. banks face.
  - Explore mechanisms for U.S. financial intermediaries to lessen fixed compliance costs by pooling resources, utilizing specialist transfer and clearing services, building common platforms, and sharing client information—particularly valuable for small recipient states.
  - Consider scope for U.S. banks to vary pricing of correspondent services to factor compliance costs into their fee structures.

### Staff appraisal (paras 45–48)
- Growth and inflation:
  - Recent pace of expansion disappointed over past few quarters but judged a temporary setback.
  - Signs of healthy growth rates resuming in the second quarter.
  - As remaining slack is eroded and employment expands, wage and price inflation should begin to rise, raising living standards and reversing some loss in labor share of income.
- External assessment:
  - The U.S. external position is moderately weaker than implied by medium-term fundamentals and desirable policies.
  - Over the medium term, fiscal consolidation and policies to raise productivity, increase the labor force, and raise saving will help maintain external stability while achieving full employment.
- Supply-side trends and policies:
  - Over a longer horizon the U.S. likely to confront complications from aging demographics, polarization of income and wealth, low productivity, declining labor force participation, falling labor share of income, compromised dynamism, and high levels of adult and child poverty.
  - Reversing these trends requires multi-front efforts, including:
    - Protections for low income households (combination of a higher federal minimum wage, more generous earned income tax credit, and a better safety net).
    - Benefits to incentivize work and support families.
    - Efforts linked to infrastructure, education, and trade to raise productivity.
  - Many solutions are legislative and will require broad political consensus and congressional action; fostering broad-based political support and seeking common ground will be essential.
  - If implemented, such measures will support U.S. economic well-being and have positive spillovers for the global economy.

*International Monetary Fund staff report excerpt*

### 49.      Fiscal policy. Congressional action over the past year has reached a compromise on fiscal

### _cr16226 - 49.      Fiscal policy. Congressional action over the past year has reached a compromise on fiscal

### Fiscal policy — assessment and recommendations
- Congressional agreements over the past year provide "the right amount of fiscal support to the U.S. economy" but those agreements last only until 2017 and "efforts can no longer be deferred on tackling the medium-term problems facing the budget."
- Options to achieve needed adjustment are many and can:
  - accommodate the needed reduction in the medium-term deficit, and
  - fund additional fiscal measures to support higher potential growth and diminish poverty.
- Annex I (Response to Past Policy Advice) summary:
  - Staff advocated a medium-term fiscal consolidation plan anchored to slow entitlement spending.
  - Staff recommended expanding near-term budget envelope via front-loaded infrastructure spending, tax-system improvements, active labor market policies, and improved educational spending, funded by offsetting savings in future years.
  - The Bipartisan Budget Act of 2015 and the Protecting Americans from Tax Hikes Act extended some tax measures and expanded the near-term deficit; several tax measures favored by staff were made permanent (including improvements to the EITC, research and experimentation tax credit, and child tax credit).
- Fiscal projections (selected indicators, percent of GDP; IMF staff-adjusted CBO March 2016 baseline):
  - Federal government revenue: 17.6 (2014), 18.2 (2015), 18.2 (2016), 18.2 (2017), 18.1 (2018), 18.0 (2019), 18.1 (2020), 18.1 (2021)
  - Federal government expenditure: 20.9 (2014), 20.8 (2015), 21.1 (2016), 20.9 (2017), 20.6 (2018), 21.1 (2019), 21.3 (2020), 21.5 (2021)
  - Budget balance: -3.3 (2014), -2.6 (2015), -3.0 (2016), -2.8 (2017), -2.5 (2018), -3.0 (2019), -3.2 (2020), -3.4 (2021)
  - Federal debt held by the public: 74.4 (2014), 73.6 (2015), 76.0 (2016), 76.0 (2017), 75.6 (2018), 75.9 (2019), 76.4 (2020), 77.0 (2021)
  - General government gross debt: 104.9 (2014), 105.7 (2015), 107.9 (2016), 107.8 (2017)

### Monetary policy — guidance and rationale
- Recommendation: "The Federal Reserve should remain data dependent."
- Staff view: "There is a clear case to proceed along a very gradual upward path for the fed funds rate."
- Rationale and caveats:
  - Likelihood and severity of downside risks to inflation.
  - Potential for a drift down in inflation expectations.
  - Federal Reserve’s dual mandate of maximum employment and price stability.
  - Asymmetries posed by the effective lower bound.
  - Consequently, "the path for policy rates should accept some modest, temporary overshooting of the Federal Reserve’s inflation goal to allow inflation to approach the Federal Reserve’s 2 percent medium-term target from above."
- Monetary policy practice to date (Annex I):
  - Staff supported deferring the first increase in policy rates until greater signs of wage or price inflation; staff implied a gradual path of increases starting in the first half of 2016.
  - The Fed raised rates in December 2015 and continues to judge further increases based on incoming data.
  - Communications emphasize the normalization path will be data dependent and gradual.

### Macrofinancial policies — vulnerabilities and data gaps
- Assessment:
  - "While there are pockets of financial sector vulnerabilities they are unlikely to prove systemic."
  - "Serious data gaps across various parts of the nonbank system" hinder assessment of leverage, vulnerabilities, and interconnections.
- Recommendations:
  - Focus on building a more complete and transparent data landscape of nonbanks.
  - The administration should oppose attempts to significantly dilute progress made in strengthening financial system resilience.
- Monetary policy and financial stability guidance (Annex I):
  - Policy rates should not be used to reduce leverage or dampen financial stability risks.
  - Emphasize strengthening macroprudential framework, developing regulatory tools, and addressing gaps in regulation and supervision.
  - Possible tools: countercyclical capital buffers or margin requirements.

### Follow-up actions and institutional recommendations
- Recommendation: next Article IV consultation to take place on the standard 12-month cycle.
- FSAP follow-up (Annex II) — selected implementation status (verbatim statuses preserved):
  - Provide an explicit financial stability mandate to all FSOC member agencies: Not implemented.
  - Include in FSOC Annual Report specific follow-up actions for each material threat identified: Partially implemented.
  - Publish the current U.S. macroprudential toolkit and prioritize further development: Partially implemented.
  - Expedite heightened prudential standards for designated non-bank SIFIs: Partially implemented.
  - Improve data collection, and address impediments to inter-agency data sharing: Partially implemented.
  - Give primacy to safety and soundness in the supervisory objectives of Federal Banking Agencies: Partially implemented.
  - Strengthen the banking supervisory framework and limit structures for related party lending and concentration risk; and update guidance for operational and interest rate risk: (status discussed; excerpts on actions such as Regulation XX issuance noted).

### Selected macroeconomic projections and key statistics (staff projections)
- Real GDP (percent change, saar): 2.4 (2015), 2.2 (2016), 2.5 (2017), 2.3 (2018), 2.0 (2019), 1.9 (2020), 2.0 (2021)
- Fed funds rate (percent): 0.1 (2015), 0.5 (2016), 1.0 (2017), 1.8 (2018), 2.6 (2019), 2.9 (2020), 2.9 (2021)
- Ten-year government bond rate (percent): 2.1 (2015), 1.9 (2016), 2.2 (2017), 2.8 (2018), 3.1 (2019), 3.3 (2020), 3.3 (2021)
- CPI inflation (q4/q4): 0.4 (2015), 1.1 (2016), 2.5 (2017), 2.6 (2018), 2.4 (2019), 2.4 (2020), 2.3 (2021)
- Core PCE Inflation (q4/q4): 1.4 (2015), 1.8 (2016), 2.1 (2017), 2.2 (2018), 2.1 (2019), 2.1 (2020), 2.0 (2021)
- Current account balance (% of GDP): -2.6 (2015), -2.9 (2016), -3.5 (2017), -3.8 (2018), -4.0 (2019), -4.0 (2020), -4.1 (2021)
- Net international investment position (% of GDP): -41.0 (2015), -44.2 (2016), -47.9 (2017), -51.7 (2018), -55.8 (2019), -59.4 (2020), -63.0 (2021)
- Personal saving rate (% of disposable income): 5.1 (2015), 5.4 (2016), 5.1 (2017), 4.7 (2018), 4.4 (2019), 4.5 (2020), 4.6 (2021)

### Structural and sectoral policy advice (Annex I highlights)
- Structural recommendations to raise potential growth and reduce poverty:
  - Expand the EITC, increase the minimum wage, invest in infrastructure and education, improve the tax system, use active labor market policies, implement broad skills-based immigration reform, and capitalize on gains from rising U.S. energy independence.
- Implementation status and developments:
  - The Administration increased wages for federal contractors; some states/localities increased minimum wages and mandated paid family leave.
  - Little progress toward tax system simplification in direction envisaged by staff; immigration reform and new revenue sources (e.g., gas tax, VAT, carbon tax) lack political traction.
  - Recent tax provisions made permanent: enhanced child tax credit, American Opportunity tax credit for college tuition, improved EITC (expanded to larger families and removing the marriage penalty), and the research and experimentation credit.
- Housing finance:
  - Staff recommended measures to increase mortgage credit availability and clarify government's role in housing finance.
  - Administrative steps were taken to lessen regulatory uncertainties and transfer risks from agencies to private investors via market transactions; legislative reforms have made little headway.

*IMF staff report content (excerpted from _cr16226).*

### Section 622 of the DFA and establish a financial sector concentration limit. It prohibits a financial

### _cr16226 - Section 622 of the DFA and establish a financial sector concentration limit. It prohibits a financial

### Financial sector concentration and Section 622
- Section 622 of the DFA prohibits a financial company from merging or consolidating with, or acquiring control of, another company if the resulting company’s liabilities would exceed 10 percent of the aggregate consolidated liabilities of all financial companies.
- FSAP BCP assessment: supervisory framework for credit concentration risk was deemed sound.
- Recommendation: reassessment of the supervisory force of the thresholds for commercial real estate exposures would be warranted.
- Implementation status noted in text: Partially implemented.

### Counterparty credit risk limits (FRB proposal, March 2016)
- Proposal applies single-counterparty credit limits to Bank Holding Companies (BHCs) with total consolidated assets of $50 billion or more, with differing limits by systemic footprint:
  - (i) GSIBs: restricted to a credit exposure of no more than 15 percent of the bank's Tier 1 capital to another systemically important financial firm, and up to 25 percent of the bank's Tier 1 capital to another counterparty.
  - (ii) BHCs with $250 billion or more in total consolidated assets, or $10 billion or more in on-balance-sheet foreign exposure: restricted to a credit exposure of no more than 25 percent of the bank's Tier 1 capital to a counterpart;.
  - (iii) BHCs with $50 billion or more in total consolidated assets: restricted to a credit exposure of no more than 25 percent of the bank's total regulatory capital to another counterparty.
  - (iv) BHCs with less than $50 billion in total consolidated assets, including community banks: would not be subject to the proposal.
- Similarly tailored requirements proposed for foreign banks operating in the United States.
- Implementation gaps: comparable supervisory guidance on other risk concentrations remains to be issued; separate and additional limits for money market investments and security holdings available to banks (but not federal savings associations) leave open the possibility of excessive risk concentrations.
- Overall implementation status in text: Partially implemented.

### Supervisory guidance gaps: credit, operational, and interest rate risk
- Operational risk reporting and supervisory guidance remain disparate.
- Interest rate risk in the banking book: approach does not include specific capital charges or limits set under Pillar 2; contrasts with treatment of other risks; further guidance remains to be issued.
- Limit structures for related party lending: publicly available information suggests no progress toward FSAP recommendation.
- Implementation status entries: Partially implemented / Not implemented (as indicated in sections).

### Insurance sector supervisory reform
- Recommendation: set up an independent insurance regulatory body with nationwide responsibilities and authority — supervisory and regulatory architecture unchanged; Not implemented.
- Recommendation: implement principle-based valuation standard for life insurers consistently across the states:
  - State insurance regulators’ Principle-based Reserving Valuation Manual will become operative as of January 1, 2017 for the 45 States and territories that have already adopted it (but some States have not agreed on adopting the standard).
  - Risk models would still be approved at State level; legislation leaves room for interpretation; harmonization not automatic.
  - Implementation status: Partially implemented.
- Recommendation: develop and implement group supervision and group-level capital requirements for insurance companies:
  - FRB approved an advance notice of proposed rulemaking (June 3, 2016) on conceptual frameworks for capital standards for systemically important insurance companies and insurers that own a bank or thrift.
  - State insurance regulators adopted a proposal for a group capital calculation (not currently framed as a requirement) and instituted a Group Capital Calculation Working Group.
  - As of May 2016, all 50 states, the District of Columbia and Puerto Rico adopted the updated NAIC model holding company act enhancing group supervisory authorities.
  - Implementation status: Partially implemented.

### Securities regulators, asset management, and market-structure recommendations
- Provide needed resources to the SEC and CFTC and enhance funding stability: publicly available information suggests no progress; Not implemented.
- Increase examination coverage of asset managers:
  - FSAP recommended SEC significantly increase asset manager examinations from current coverage of only around 10 percent of investment advisers per year; Not implemented.
- Introduce explicit requirements on risk management and internal controls for asset managers and commodity pool operators:
  - FSOC published a review (April 2016) recommending establishment of explicit risk management requirements for asset managers; Not implemented.
- Complete assessment of equity market structure: SEC’s Equity Market Structure Advisory Committee continued to meet; assessment not completed; Not implemented.

### Stress testing, liquidity standards, and network analysis
- CCAR and DFA stress tests are supervisory solvency stress tests; systemic risk not specifically assessed.
- Liquidity Coverage Ratio (LCR):
  - Final rule finalized in September 2014; requires large banking organizations to hold a minimum amount of high-quality liquid assets usable to meet net cash outflows over a 30-day stress period.
  - Firms required to be fully compliant by January 1, 2017.
- Net Stable Funding Ratio (NSFR) proposal (May 2016):
  - Proposed to become effective January 1, 2018.
  - Specification conditional on bank risk; most stringent requirements for largest firms: those with $250 billion or more in total consolidated assets or $10 billion or more in on-balance sheet foreign exposure, as well as those banking organizations' subsidiary depository institutions that have assets of $10 billion or more.
  - BHCs with less than $250 billion, but more than $50 billion in total consolidated assets, and less than $10 billion in on-balance sheet foreign exposure: subject to a less stringent, modified NSFR requirement.
  - Rule would not apply to holding companies with less than $50 billion in total consolidated assets and would not apply to community banks.
  - Holding companies subject to the proposal would be required to publicly disclose NSFR levels each quarter.
- Stress testing gaps:
  - DFA stress tests and CCAR focus on credit and market risk, not on funding and market liquidity risk.
  - Authorities do not regularly conduct liquidity stress tests on nonbanks.
  - Network analysis and contagion/spillover risks not integrated into CCAR/DFA tests; tests look at banks individually.
- Implementation status: Partially implemented.

### Insurance and asset management stress testing
- Insurance: State regulators assess firm ORSA stress tests on a consolidated group-level basis, but no macroprudential insurance sector stress testing performed by regulators; Partially implemented.
- Asset management: FSOC review (April 2016) recommended:
  - Requirements for robust liquidity risk management practices for mutual funds, including stress testing;
  - Guidelines on funds’ holdings of less liquid assets;
  - Enhanced reporting and public disclosure;
  - Reallocation of redemption costs.
- Implementation status: Partially implemented.

### Market-based finance and systemic liquidity (mutual funds, MMMFs)
- FSOC recommended changes in redemption structures to allow allocation of redemption costs to redeeming investors (to reduce first-mover advantage).
- SEC proposed rule (September 2015) to enhance liquidity risk management, disclosures, and allow swing pricing for MFs and ETFs.
- Money Market Mutual Funds (MMMFs) and variable NAV:
  - New SEC rules require floating NAVs for institutional prime MMMFs but allow retail and government MMMFs to continue using an amortized cost method with constant NAVs.
  - For retail/govt MMMFs, rules provide new tools—liquidity fees and redemption gates—but structural vulnerabilities remain; government MMMF framework unchanged.
  - Rules provide a two-year transition period for implementation.
  - IMF staff and FSOC had recommended floating NAVs for MMMFs.
- Implementation status: Partially implemented.

### Triparty repo (TPR) reforms and repo market resilience
- TPR reforms: Fully implemented.
  - Intra-day credit extended to collateral providers largely eliminated via settlement cycle modifications and improved collateral allocation.
  - Clearing banks limited to funding a maximum of 10 percent of a dealer’s notional tri-party book through pre-committed lines (incurring a capital charge).
  - Unwinding of inter-dealer GCF repos moved to 3:30 pm to align repo settlement with new triparty settlement process.
- Remaining issues:
  - Resilience needs enhancement to reduce fire-sale risk and reliance on two clearing banks.
  - Need to closely monitor the CCP that settles interbank GCF repo transactions, particularly as Fixed Income Clearing Corporation suspends GCF repo transactions on an interbank basis starting July 2016, and to take further measures to reduce usage of intraday credit if interbank GCF repo program is restored.
  - Potential for fire sales of collateral by a dealer losing access to repo or by a dealer’s creditors remains significant despite progress.
  - Data gaps limit regulators’ ability to monitor the aggregate repo market and interdependencies among firms.
- Implementation status: Implemented / Fully implemented (as specified).

### Securities lending data and broker-dealer regulation
- Securities lending data collection:
  - OFR, FRB, and SEC completed a joint securities lending data collection pilot in early 2016.
  - FSOC (April 2016) encouraged enhanced and regular data collection and interagency data sharing; encouraged efforts to propose and adopt a rule for permanent securities lending data collection.
  - Implementation status: Partially implemented.
- Broker-dealer regulation, liquidity and leverage:
  - Authorities regulate leverage via product-based measures: margin rules, central clearing of derivatives, margin requirements for uncleared swaps.
  - These rules apply only to broker-dealers under a bank holding company; leverage can still increase through other instruments (e.g., commercial paper).
  - December 2015: SEC proposed rules on derivatives use by registered investment companies—limits on leverage from derivatives and formalized risk management for complex funds.
  - October 2015: FRB, FDIC, OCC, FCA, and FHFA issued final rule on capital and margin requirements for common swap entities; another final rule specified which non-cleared swaps are exempted.
  - Variation margin requirement to be phased in over six months starting September 2016.
  - Transatlantic CCPs: EC and CFTC agreement on Common Approach for Transatlantic CCPs OTC Derivatives Reform agenda to allow recognition/equivalence; promotes harmonization.
  - Implementation status: Partially implemented.

### Data availability across repo, triparty repo, and securities lending markets
- OFR’s Bilateral Repo Data Collection Pilot Project collects data about bilateral repos.
- Data on triparty and GCF repo markets are published regularly.
- Data gaps remain significant for securities lending and asset management; bilateral repo data collection still at an early stage.
- Implementation status: Partially implemented.

### Liquidity backstops, crisis preparedness, and resolution
- Revamp the Primary Credit Facility as a monetary instrument: facility expired in 2010; no progress; Not implemented.
- Enable the Fed to lend to solvent non-banks designated as systemically important:
  - November 2015: Federal Reserve approved a final rule specifying procedures for emergency lending under Section 13(3) of the Federal Reserve Act.
  - Since DFA 2010, FRB emergency lending is limited to programs/facilities with "broad-based eligibility" established with approval of Secretary of the Treasury.
  - Final rule defines "broad-based" as a program or facility not designed to aid any number of failing firms and in which at least five entities would be eligible to participate.
  - Restrictions limit the Federal Reserve in taking action to avoid or minimize contagion, particularly from solvent non-banks designated as systemic by the FSOC.
  - Implementation status: Partially implemented.
- Assign formal crisis preparedness and management coordinating role to FSOC: not implemented.
- Extend Orderly Liquidation Authority (OLA) powers to cover systemically-important insurance companies and U.S. branches of foreign-owned banks:
  - Systemically important U.S. insurance holding companies can be resolved using OLA powers.
  - State-based resolution regimes have tools for insurance company liquidations but capacity to deal with insurance company subsidiaries of a systemically important holding company remains untested.
  - Single Point of Entry resolution strategy generally would not affect foreign bank branches in the United States.
  - Implementation status: Partially implemented.
- Adopt powers to support foreign resolution measures; extend preference to overseas depositors:
  - Depositor preference rules and ring-fencing can complicate coordination and increase ring-fencing likelihood.
  - Information-sharing agreements and progress on effective group-wide resolution plans and enhancing resolvability are not fully implemented.
  - Implementation status: Partially implemented.
- Finalize recovery and resolution plans for SIFIs; agree cooperation agreements with overseas authorities:
  - Recovery plans: responsibility placed on firm senior management; board oversight; updated at least annually.
  - FDIC developed resolution plans for G-SIFIs meeting Key Attributes.
  - Living wills: majority of firms’ submitted plans so far deemed not credible to facilitate orderly resolution under U.S. Bankruptcy Code; living wills have shown progress and continue to evolve.
  - Progress includes adherence to ISDA 2015 Universal Resolution Stay Protocol, issuance of long-term debt from top-tier parent to absorb losses, operational continuity steps, legal entity rationalization, and enhanced liquidity monitoring.
  - Implementation status: Partially implemented.

### Financial Market Infrastructures (FMIs)
- Identify and manage system-wide risks related to interdependencies among FMIs, banks, and markets:
  - U.S. authorities participated in FSB work on continuity of access to FMIs for members in resolution and resolution strategies for FMIs.
  - Authorities have commenced information sharing related to resolution matters and are actively engaging in resolution planning for systemic CCPs.
  - Issues warranting further attention: cyber resilience, standardized stress testing, harmonized margin requirements, implementation of recovery and resolution regimes, adequacy of CCPs’ loss absorbing capacity in resolution, and coordination between supervisors of CCPs and main clearing members.
  - Implementation status: Partially implemented.
- Offer Fed accounts to designated Financial Market Utilities (FMUs) to reduce dependencies on commercial bank services:
  - April 2016: Federal Reserve Bank of Chicago authorized three U.S. clearing houses (run by CME Group and Intercontinental Exchange) and the Options Clearing Corporation to open accounts at the central bank.
  - Measure enabled by designation of clearing houses as systemically important utilities.
  - Implementation status: Implemented.

### Housing finance reforms and risks
- Comprehensive housing market reform: not achieved; Housing finance and U.S. housing market not reformed comprehensively.
- Government action: limited changes to footprint of Government Sponsored Entities (GSEs); Fannie Mae and Freddie Mac continue to dominate market; availability of mortgages remains wider than without GSE dominance.
- Observations and risks:
  - Lender surveys show credit standards loosening continuously since end-2014, indicating loan loss impairments for the GSEs may increase going forward despite a recent decline.
  - GSEs’ capital buffer could erode; Treasury funds may be needed.
  - Since 2015, GSEs must transfer funds to the Housing Trust Fund (per 2008 Housing and Economic Recovery Act), placing additional pressure on GSEs’ finances.
  - Qualified Mortgage (QM) rule (September 21, 2015) may stimulate housing market by providing smaller banks protection under Ability-to-repay regulation, potentially giving smaller banks a competitive advantage and extending housing credit; large banks continue to tighten standards and reduce mortgage exposure, increasing nonbanks’ market share.
  - Congressional Budget Office continues to push for modification of GSEs’ operations; four options discussed including a hybrid approach with investor first-loss and federal guarantee for remainder; little momentum for decisive reform.
  - House Financial Services Committee (March 2016) passed three bills aiming to reduce regulatory reporting for small banks (H.R. 2896), modify Volcker Rule for smaller banks/businesses (H.R.4096), and exempt certain commercial real estate loans from Dodd-Frank risk retention (H.R. 4620).
  - Two earlier bills (H.R.2733; S.1217) did not pass Congress.
- Implementation status: Not implemented.

*Source: IMF staff compilation from the provided content.*

### Annex III. Risk Assessment Matrix

### _cr16226 - Annex III. Risk Assessment Matrix

### Risk Assessment Matrix — key risks and quantified impacts
- Sharp asset price decline and decompression of credit spreads
  - Overall Level of Concern: Medium
  - Likelihood of Realization: Medium
  - Expected impact: "A persistent 1 percent decompression of credit spreads could subtract about ½ percent of GDP after two years. Sustained spikes in term premia could imply greater output losses."
- Surge in the US dollar
  - Overall Level of Concern: High
  - Likelihood of Realization: Medium
  - Expected impact: "A persistent 10% dollar appreciation reduces GDP by 0.5 percentage points in the first year and 0.5-0.8 percentage points in the second year, ceteris paribus."
- Persistently lower oil prices
  - Overall Level of Concern: Medium
  - Likelihood of Realization: Low
  - Expected impact: With oil investment already cut in half in the past 2 years, further declines are likely to have small effects on aggregate growth, "with potential upsides if consumption effects kick in."
- Faster increases in interest rates
  - Overall Level of Concern: Medium
  - Likelihood of Realization: Medium
  - Expected impact: "A permanent 50 bps surprise increase in 10-year interest rates could subtract about ½ percent of GDP after two years. Sustained spikes in term and risk premia could imply greater output losses."
- Slower U.S. potential growth
  - Overall Level of Concern: Low
  - Likelihood of Realization: High
  - Expected impact: "Greater inflationary pressures would lead to a steeper path for policy rates and create market volatility. Lower medium-term growth would worsen poverty, increase debt-GDP, and create negative global spillovers."
- Structurally weak growth in key advanced and emerging economies
  - Overall Level of Concern: High
  - Likelihood of Realization: Medium
  - Expected impact: "A 1 percentage point decline in growth in advanced and emerging economies could subtract about 0.1 percentage point of U.S. GDP after two years."
- British voters elect to leave the European Union
  - Overall Level of Concern: High
  - Likelihood of Realization: Medium/Low
  - Expected impact: "The likely increase in risk premia could result in a stronger U.S. dollar and lower Treasury yields with an uncertain impact on the U.S. economy."

### RAM methodology note (staff interpretation of likelihoods)
- "Low" indicates a probability below 10 percent.
- "Medium" indicates a probability between 10 and 30 percent.
- "High" indicates a probability between 30 and 50 percent.

---

### Public Debt Sustainability Analysis — main findings

### Baseline trajectory and fiscal outlook
- Background: Federal public debt ratio doubled since 2007; consolidation measures legislated in 2011–13; Bipartisan Budget Acts of 2013 and 2015 partially reversed automatic cuts; Tax Act of 2015 extended many tax cuts.
- Baseline assumptions: Current laws, except automatic spending cuts beyond FY2017 are assumed partially reversed and replaced (similar to 2013 and 2015 deals).
- Projected debt path:
  - "Federal debt held by the public is projected to increase from 75 percent of GDP now to close to 82 percent of GDP in FY2025."
  - "General government gross debt exceeding 108 percent of GDP by FY2025."
- Conclusion: "Despite the substantial deficit reduction achieved so far and the legislated savings in the pipeline, the U.S. public finances remain on an unsustainable trajectory."

### Adjustment scenario (recommended medium-term stance)
- 2015 general government primary balance: "-1½ percent of GDP."
- Staff recommendation: "Aiming for a medium-term general government primary surplus of about ¾ percent of GDP (a federal government surplus of about 1 percent of GDP) would be appropriate to put the public debt ratio firmly on a downward path."
- Note: "The target primary surplus would have to be higher in the long run to bring the debt ratio closer to the pre-crisis levels by 2030."

### Debt servicing and interest rate outlook
- Effective interest rate projections:
  - "The effective interest rate is projected to rise gradually from the current historical lows and reach about 4¾ percent by 2025 (compared to an average of about 3½ percent over 2005–2015)."
- Implication: "As a result, real interest rates will become a major debt-creating flow over the medium-term."

---

### Stress tests, sensitivity analyses, and scenarios

### Key stress-test results (sensitivity to shocks)
- Interest-rate and growth shocks:
  - "An increase of 200 basis points in the sovereign risk premium would mean a debt ratio that is about 15 percentage points above the baseline."
  - "If real GDP growth turns out to be one standard deviation below the baseline, the public debt would increase by about 8 percentage points above the baseline."
  - "A scenario involving a 1 percentage point slippage in the planned consolidation over the next two years would lead to a debt-to-GDP ratio of 110 percent in 2025."
  - "A combined macro-fiscal shock could raise the public debt ratio as high as 132 percent of GDP by the end of the 10-year horizon."
- Exchange rate shock: "An exchange rate shock is unlikely to have important implications for debt sustainability in the United States given that all debt is denominated in local currency and the reserve currency status of the dollar."

### Stress-test scenario summaries (selected underlying assumptions)
- Effective interest rate baseline and shocks (examples from DSA projections):
  - Baseline effective interest rate series (selected years): 2016: 1.3; 2017: 2.1; 2018: 2.5; 2019: 2.8; 2020: 3.2; 2025: 4.9 (percent).
  - Real Interest Rate Shock effective interest rate series (selected years): 2016: 1.3; 2017: 2.1; 2018: 2.9; 2019: 3.5; 2020: 4.2; 2025: 6.6 (percent).
- Primary balance scenarios (selected series):
  - Baseline primary balance (percent of GDP): 2016: -1.9; 2017: -1.7; 2018: -1.4; 2025: -0.8.
  - Constant primary balance scenario (percent of GDP): primary balance remains -1.9 from 2016 through 2025.
  - Primary Balance Shock scenario (percent of GDP): 2016: -1.9; 2017: -3.5; 2018: -3.3; 2019: -1.5.

### Additional stress-test outcomes (systemic indicators)
- Public gross financing needs and market indicators (select context):
  - Public gross financing needs (example values from table): 2016: 19.0 (percent of GDP) and projected series through 2025 showing values around low- to mid-20s in some years (see DSA projections).
  - Debt-stabilizing primary balance: 0.8 (percent of GDP) reported in the DSA header.

---

### Realism, mitigating factors, and policy implications

### Realism
- "Baseline economic assumptions and fiscal projections are generally within the error band observed for all countries."
- "While ambitious, the projected fiscal adjustment is realistic based on the consolidation episodes observed in 1990–2011."

### Mitigating factors
- "The depth and liquidity of the U.S. Treasury market as well as its safe haven status at times of distress represent a mitigating factor for relatively high external financing requirements."

### Policy priority
- "A medium-term, credible consolidation plan remains a key policy priority."

---

*Source: IMF staff (Annex III: Risk Assessment Matrix; Annex IV: Public Debt Sustainability Analysis) as presented in the provided content unit._*

### Annex V. External Sector Assessment

### Annex V. External Sector Assessment

### Foreign asset and liability position and trajectory
- NIIP declined from -18.7 percent of GDP in 2010 to -38.8 percent of GDP in 2015, reflecting sustained current account deficits, stronger performance of the U.S. stock market relative to trading partners, and valuation changes of foreign currency denominated assets.
- Under staff’s baseline scenario, U.S. NIIP would deteriorate by about 10 percentage points of GDP over the next five years predominantly due to projected current account deficits.
- Potential valuation losses, including from losses on FDI assets in overseas energy projects, are a source of uncertainty.
- Most U.S. foreign assets are denominated in foreign currency and over 50 percent are in the form of FDI and portfolio equity claims, whose value tend to decline when global growth and stock markets are weak, as well as when the U.S. dollar appreciates.
- Gross assets and liabilities are about 140 and 180 per cent of GDP, respectively. (Technical note)

### Overall assessment
- The U.S. external position was moderately weaker than implied by medium-term fundamentals and desirable policies.
- As of May 2016 the REER has strengthened marginally relative to the 2015 average, but this does not change the overall assessment.
- The U.S. external position has improved considerably in recent years, as have assessed imbalances and fiscal policy gaps.
- Solid U.S. economic performance and divergence of U.S. growth and monetary policy prospects from key trading partners has led to a strengthening of the U.S. dollar and a rise in the current account deficit.

### Recommended policies
- Over the medium term, fiscal consolidation should aim for a general government primary surplus of about ¾ percent of GDP (a federal government primary surplus of about 1 percent of GDP).
- Structural policies should be implemented to raise productivity, increase labor force growth, and, thus, raise saving.
- These policies would be consistent with maintaining external stability while achieving full employment.

### Current account
Background and outlook
- The U.S. current account (CA) balance narrowed from its pre-crisis height of -6 percent of GDP to -2.6 percent of GDP in 2015 (cyclically adjusted -2.6 percent as well), reflecting a sharp reduction in the fiscal deficit, higher private saving, lower investment in the aftermath of the financial crisis, and a stronger energy trade balance (due to the rapid increase of unconventional energy production).
- The CA deficit is expected to rise moderately but steadily from its low point in 2014 through the medium-term as the effects of a stronger U.S. economy and the lagged effects of a more appreciated U.S. dollar are only partly offset by lower oil prices.
Assessment
- The EBA model estimates a cyclically-adjusted CA gap of 1.7 percent of GDP for 2015 which is primarily accounted for by a (policy-unrelated) residual.
- Staff view: the gap is moderately overstated because the estimation of the EBA CA norm does not fully account for the discovery of shale oil, which resulted in a substantial wealth gain.
- Taking this factor into account, the CA norm should be smaller, reducing the CA gap by about ¼ percent of GDP.

### Real exchange rate
Background
- The real effective exchange rate (REER) appreciated in 2015 by about 11 percent compared to 2014 due to solid U.S. economic performance and divergence of U.S. growth and monetary policy from key trading partners.
- As of May 2016, the REER was about 1 percent stronger than its average value over 2015.
Assessment
- Indirect estimates of the REER (relying on the EBA current account assessment) suggest the exchange was overvalued by almost 20 percent in 2015.
- Direct REER analyses suggest an overvaluation of between 14-23 percent.
- Considering all estimates and the uncertainties around them, staff assess the 2015 average REER to be overvalued by 10-20 percent relative to the level implied by medium-term fundamentals and desirable policies.

### Capital and financial accounts: flows and policy measures
Background and flows
- Net financial inflows were about 2 percent of GDP in 2015.
- Portfolio inflows increased by about 0.4 percent, year over year, in 2015 but were offset by weaker direct investment and other inflows.
- On the outflow side, there were further increases in U.S. portfolio investment overseas, but much less so than in 2014.
- The stronger outlook for the U.S. economy compared to its key trading partners, the dollar’s reserve currency status and safe haven motives continue to boost foreign demand for U.S. Treasury securities.
Assessment
- The U.S. has a fully open capital account.
- Vulnerabilities are limited by the dollar’s status as a reserve currency and the U.S. role as a safe haven.
- Net financial inflows of about 2 percent of GDP in 2015 are substantially below pre-crisis levels of about 5.0 percent of GDP. (Technical note)

### FX intervention & reserves level
- Assessment: The dollar has the status of a global reserve currency.
- Reserves held by the U.S. are typically low relative to standard metrics but the currency is free floating.

### Technical background notes (selected)
- The U.S. has a positive net equity position, with sizable portfolio equity and direct investment abroad, and a negative debt position vis-à-vis the rest of the world, owing to sizeable foreign holdings of U.S. Treasuries and corporate bonds.
- The oil and gas portion of the CA had a deficit of 0.5 percent of GDP in 2015, 0.5 percentage points lower than in 2014, reflecting less net imports and lower oil prices.
- Because of the discovery of shale and related investments to build capacity for exports, the CA norm is estimated to be about 0.25 percent of GDP smaller than the one estimated by EBA, hence narrowing the gap.
- The two direct EBA models are the REER Index model and the REER Level model.

### Statement by the IMF Staff Representative (selected updates as of July 8, 2016)
- Growth in the first quarter was revised up from 0.8 to 1.1 percent due to stronger net exports and non-residential investment.
- Real private consumption expenditure (PCE) for April and May grew by 0.8 and 0.3 percent m/m, respectively.
- The team’s growth forecast for 2016 is 2.2 percent, supported by the stronger spending momentum and the upward revision to first quarter growth.
- U.S. markets reacted negatively to the result of the U.K. referendum; after an initial sell-off, U.S. stock markets recovered and the U.S. dollar, in nominal effective terms, appreciated by less than 1 percent.
- Long-term treasury yields fell to 1.4 percent on 10-year bonds, driven by safe haven flows and expectations of a slower pace of future policy rate increases.
- The team expects the impact of the U.K. referendum on the baseline to be small but views risks to the outlook as skewed to the downside; if downside risks materialize, interest rate increases should be delayed in line with a data dependent approach and near-term fiscal spending could be increased if growth decelerates substantially.
- On June 30, the President signed PROMESA, and after passage of the law, Puerto Rico defaulted on US$1.9 billion of debt obligations.
- The Federal Reserve’s 2016 CCAR: all 33 participating bank holding companies passed the supervisory stress test; the Federal Reserve objected to the capital plans of U.S. subsidiaries of Deutsche Bank and Banco Santander on qualitative grounds.

*Annex V. External Sector Assessment — IMF staff report content*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16226.pdf_