© 2015 International Monetary Fund 

IMF Country Report No. 15/168 

UNITED STATES 

2015 ARTICLE IV CONSULTATION—PRESS RELEASE; 

STAFF REPORT 

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions 

with members, usually every year. In the context of the 2015 Article IV consultation with 

the United States, the following documents have been released and are included in this 

package: 

 A Press Release summarizing the views of the Executive Board as expressed during its 

July 6, 2015 consideration of the staff report that concluded the Article IV consultation 

with the United States. 

 The Staff Report prepared by a staff team of the IMF for the Executive Board’s 

consideration on July 6, 2015, following discussions that ended on June 3, 2015, with 

the officials of the United States on economic developments and policies. Based on 

information available at the time of these discussions, the staff report was completed 

on June 18, 2015. 

 An Informational Annex prepared by the IMF staff. 

 A Staff Statement updating information on recent developments. 

The documents listed below have been or will be separately released. 

Selected Issues 

Financial Stability System Assessment 

The IMF’s transparency policy allows for the deletion of market-sensitive information and 

premature disclosure of the authorities’ policy intentions in published staff reports and 

other documents. 

Copies of this report are available to the public from 

International Monetary Fund  Publication Services 

PO Box 92780  Washington, D.C. 20090 

Telephone: (202) 623-7430  Fax: (202) 623-7201 

E-mail: publications@imf.org Web: http://www.imf.org 

Price: $18.00 per printed copy 

International Monetary Fund 

Washington, D.C. 

July 2015 
Press Release No. 15/322

FOR IMMEDIATE RELEASE

July 7, 2015

IMF Executive Board Concludes Article IV Consultation with United States

On July 6, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the 

Article IV consultation with the United States.

1

The U.S. economy’s momentum in the first quarter was sapped by unfavorable weather, a sharp 

contraction in oil sector investment, and the West Coast port strike. But the underpinnings for a 

continued expansion remain in place. A solid labor market, accommodative financial conditions, 

and cheaper oil should support a more dynamic path for the remainder of the year. Despite this, 

the weaker outturn in the first few months of this year will unavoidably pull down 2015 growth, 

which is now projected at 2.5 percent. Stronger growth over the next few years is expected to 

return output to potential before it begins steadily declining to 2 percent over the medium term.

Inflation pressures remain muted. In May headline and core personal consumption expenditure 

(PCE) inflation declined to 0.2 and 1.2 percent year on year, respectively. Long-term 

unemployment and high levels of part-time work both point to remaining employment slack, and 

wage indicators on the whole have shown only tepid growth. When combined with the dollar 

appreciation and cheaper energy costs, inflation is expected to rise slowly staring later in the 

year, reaching the Federal Reserve’s 2 percent medium-term objective by mid 2017.

An important risk to growth is a further U.S. dollar appreciation. The real appreciation of the 

currency has been rapid, reflecting cyclical growth divergences, different trajectories for 

monetary policies among the systemically important economies, and a portfolio shift toward U.S. 

dollar assets. Lower oil prices and increasing energy independence have contained the U.S. 

current account deficit, despite the cyclical growth divergence with respect to its main trading 

partners and the rise in the U.S. dollar. Nevertheless, over the medium term, at current levels of 

 

1

Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually 

every year. A staff team visits the country, collects economic and financial information, and discusses with officials 

the country's economic developments and policies. On return to headquarters, the staff prepares a report, which 

forms the basis for discussion by the Executive Board.

International Monetary Fund

700 19th Street, NW

Washington, D. C. 20431 USA
2

the real exchange rate, the current account deficit is forecast to widen toward 3.5 percent of 

GDP.

Despite important policy uncertainties, the near term fiscal outlook has improved, and the federal 

government deficit is likely to move modestly lower in the current fiscal year. Following a 

temporary improvement, the federal deficit and debt-to-GDP ratios are, however, expected to 

begin rising again over the medium term as aging-related pressures assert themselves and interest 

rates normalize. In the near-term, the potential for disruption from either a government shutdown 

or a stand-off linked to the federal debt ceiling represent important (and avoidable) downside 

risks to growth and job creation that could move to the forefront, once again, later in 2015.

Much has been done over the past several years to strengthen the U.S. financial system. 

However, search for yield during the prolonged period of low interest rates, rapid growth in 

assets in the nonbank sector, and signs of stretched valuations across a range of asset markets 

point to emerging pockets of vulnerabilities. The more serious risks are likely to be linked to: (1) 

the migration of intermediation to the nonbanks; (2) the potential for insufficient liquidity in a 

range of fixed income markets that could lead to abrupt moves in market pricing; and (3) lifeinsurance companies that have taken on greater market risk. But several factors mitigate these 

downsides. In particular, the U.S. banking system has strengthened its capital position (Tier 1 

capital as a ratio of risk-weighted assets is at about 13 percent) and appears resilient to a range of 

extreme market and economic shocks. In addition, overall leverage does not appear excessive, 

household and corporate balance sheets look generally healthy, and credit growth has been 

modest.

The consultation focused on the prospects for higher policy rates and the outlook for, and policy 

response to financial stability risks, integrating the findings of the latest IMF Financial Sector 

Assessment Program for the U.S.

Executive Board Assessment2

Executive Directors agreed with the thrust of the staff appraisal. They noted that the economic 

recovery continues to be underpinned by strong fundamentals, despite a temporary setback, 

while risks remain broadly balanced. Directors observed that considerable uncertainties, both 

domestic and external, weigh on the U.S. economy, with potential repercussions for the global 

economy and financial markets elsewhere. These include the timing and pace of interest rate 

increases, prospects for the dollar, and risks of weaker global growth. Directors stressed that 

 

2 At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of 

Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers 

used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.
3

managing these challenges, as well as addressing longstanding issues of public finances and 

structural weaknesses, are important policy priorities in the period ahead.

Directors agreed that decisions on interest rate increases should remain data-dependent, 

considering a broad range of indicators and carefully weighing the trade-offs involved. 

Specifically, they saw merit in awaiting clear signs of wage and price inflation, and sufficiently 

strong economic growth before initiating an interest rate increase. Noting the importance of the 

entire path of future policy rate changes, including in terms of the implications for outward 

spillovers and for financial markets, Directors were reassured by the Federal Reserve’s intention 

to follow a gradual pace of normalization. They welcomed the Federal Reserve’s efforts, and 

commitment to continue, to communicate its policy intentions clearly and effectively. Directors 

acknowledged that financial stability risks could arise from a protracted period of low interest 

rates. In this regard, they underscored the importance of strong regulatory, supervisory, and 

macroprudential frameworks to mitigate these risks. 

Directors commended the authorities for the progress in reinforcing the architecture for financial 

sector oversight. They concurred with the main findings and recommendations of the Financial 

Sector Assessment Program assessment. Directors highlighted the need to complete the 

regulatory reforms under the Dodd-Frank Act and to address emerging pockets of vulnerability 

in the nonbank financial sector. They encouraged continued efforts to monitor and manage risks 

in the insurance sector, close data gaps, and improve the effectiveness of the Financial Stability 

Oversight Council while simplifying the broader institutional structure over time. Directors 

looked forward to further progress in enhancing cross-border cooperation among national 

regulators, and the framework for the resolution of cross-jurisdiction financial institutions.

Directors noted that there remain a range of challenges linked to fiscal health, lackluster business 

investment and productivity growth, and growing inequality. They agreed that reforms to the tax, 

pension, and health care systems will help create space for supporting near-term growth, 

including through infrastructure investment. Directors reiterated the need for a credible 

medium-term fiscal strategy that would anchor ongoing consolidation efforts, underpin debt 

sustainability, and reduce fiscal uncertainties. They called for renewed efforts to implement 

structural reforms to boost productivity and labor force participation, tackle poverty, address 

remaining weaknesses in the housing market, and advance the multilateral trade agenda.

It is expected that the next Article IV consultation with the United States will be held on the 

standard 12-month cycle.
4

United States: Selected Economic Indicators 1/

(percentage change from previous period, unless otherwise indicated)

Projections

2014 2015 2016 2017 2018 2019 2020

National production and income

Real GDP 2.4 2.5 3.0 2.7 2.5 2.3 2.0

Net exports 2/ -0.2 -0.7 -0.5 -0.4 -0.4 -0.3 -0.3

Total domestic demand 2.5 3.0 3.5 3.0 2.7 2.5 2.2

Final domestic demand 2.5 2.9 3.5 3.0 2.8 2.5 2.2

Private final consumption 2.5 3.1 3.4 2.8 2.6 2.5 2.1

Public consumption expenditure 0.4 0.8 1.2 1.1 1.0 1.2 1.0

Gross fixed domestic investment 3.9 3.8 5.6 5.2 4.4 3.5 3.4

Private fixed investment 5.3 4.6 6.5 6.1 5.2 3.9 3.8

Equipment and software 6.4 5.5 7.2 7.0 5.7 3.7 4.3

Intellectual property products 3.8 4.1 4.0 3.8 3.7 3.0 2.3

Nonresidential structures 8.2 -1.2 3.7 3.0 3.0 2.2 2.1

Residential structures 1.6 6.5 10.4 9.3 7.4 5.7 5.0

Public fixed investment -2.5 0.1 1.2 0.8 0.4 1.2 1.2

Change in private inventories 2/ 0.1 0.1 0.0 0.0 0.0 0.0 0.0

Nominal GDP 3.9 3.3 4.5 4.6 4.7 4.6 4.2

Personal saving rate (% of disposable income) 4.9 5.3 5.2 5.2 5.2 5.0 4.9

Private investment rate (% of GDP) 16.4 16.8 17.3 17.7 18.1 18.2 18.4

Unemployment and potential output

Unemployment rate 6.2 5.4 5.1 5.0 4.9 4.8 5.0

Potential GDP 1.9 2.0 2.1 2.2 2.2 2.2 2.1

Output gap (% of potential GDP) -2.0 -1.6 -0.7 -0.2 0.0 0.2 0.0

Inflation

CPI inflation (q4/q4) 0.6 0.0 1.7 2.2 2.4 2.4 2.3

Core CPI Inflation (q4/q4) 0.6 0.0 1.7 2.2 2.4 2.4 2.3

PCE Inflation (q4/q4) 0.7 0.7 1.4 1.9 2.2 2.2 2.0

Core PCE Inflation (q4/q4) 1.4 1.3 1.6 2.0 2.2 2.1 2.0

GDP deflator 1.5 0.8 1.4 1.9 2.2 2.3 2.1

Government finances

Federal government (budget, fiscal years)

Federal balance (% of GDP) -3.2 -2.8 -3.0 -2.6 -2.5 -2.9 -3.2

Debt held by the public (% of GDP) 74.0 74.9 75.3 75.0 74.5 74.4 74.8

General government (GFSM 2001, calendar years)

Net lending (% of GDP) -4.9 -4.4 -4.2 -3.8 -3.7 -4.0 -4.2

Primary structural balance (% of potential GDP) -2.3 -1.8 -1.8 -1.5 -1.4 -1.6 -1.6

Gross debt (% of GDP) 106.4 107.3 107.9 107.9 107.6 107.6 108.2

Interest rates (percent)

Fed funds rate 0.1 0.1 0.8 1.9 2.9 3.5 3.5

Three-month Treasury bill rate 0.0 0.0 0.7 1.8 2.8 3.4 3.4

Ten-year government bond rate 2.5 2.3 3.0 3.6 4.1 4.6 4.8

Balance of payments

Current account balance (% of GDP) -2.4 -2.7 -2.9 -3.1 -3.2 -3.3 -3.4

Merchandise trade balance (% of GDP) -4.2 -4.1 -4.2 -4.4 -4.5 -4.6 -4.8

Export volume (NIPA basis, goods) 4.0 0.3 3.8 3.0 3.5 4.2 4.5

Import volume (NIPA basis, goods) 4.1 5.3 5.8 5.5 5.7 5.6 5.7

Net international investment position (% of GDP) -39.7 -41.3 -42.9 -45.8 -49.1 -53.0 -59.0

Saving and investment (% of GDP)

Gross national saving 18.1 17.8 17.6 17.8 18.0 18.0 18.0

General government -1.6 -1.5 -1.3 -1.0 -1.0 -1.3 -1.6

Private 19.8 19.2 19.0 18.8 19.0 19.3 19.6

Personal 3.6 4.0 3.9 3.9 3.9 3.7 3.6

Business 16.1 15.2 15.1 15.0 15.1 15.6 15.9

Gross domestic investment 19.8 20.1 20.5 20.9 21.1 21.2 21.4

Private 16.4 16.8 17.3 17.7 18.1 18.2 18.4

Public 3.4 3.3 3.2 3.2 3.1 3.0 3.0

Sources: Haver Analytics; and IMF staff estimates

1/ Components may not sum to totals due to rounding

2/ Contribution to real GDP growth, percentage points
UNITED STATES

 

UNITED STATES

STAFF REPORT FOR THE 2015 ARTICLE IV CONSULTATION

KEY ISSUES

Strategy: The 2015 U.S. Article IV consultation centered on the prospects for higher 

policy rates and the outlook for, and policy response to, financial stability risks, 

integrating the findings of the Financial Sector Assessment Program (FSAP).

Main findings and policy messages: 

 The underpinnings for continued growth and job creation remain in place despite

momentum being sapped in recent months.

 The FOMC should remain data dependent, carefully weighing the risk of weakening 

progress toward full employment and having to return to zero interest rates versus

the risk of creating a temporary rise of inflation above the Fed’s medium-term goal

and having to subsequently raise policy rates at a faster pace. 

 The FOMC should defer its first increase in policy rates until there are greater signs of 

wage or price inflation than are currently evident. Based on staff’s macroeconomic 

forecast, and barring upside surprises to growth and inflation, this would imply a

gradual path of policy rate increases starting in the first half of 2016.

 Pockets of financial vulnerabilities are emerging, putting a premium on improving the 

resilience of the financial system. Regulatory reforms remain incomplete and the 

structure of oversight has scope to be strengthened along a number of dimensions.

 A credible and detailed medium-term consolidation plan is needed to address rising 

health and social security costs and to improve the tax system. Such a plan would 

provide near-term fiscal space to finance supply-side measures that support future 

growth.

 A range of policy challenges linked to poverty, productivity, and labor force 

participation remain largely unaddressed.

June 18, 2015
UNITED STATES

2 INTERNATIONAL MONETARY FUND 

CONTENTS

THE MACRO OUTLOOK______________________________________________________________________________4

RISKS TO STRONG AND SUSTAINED GROWTH__________________________________________________ 14

THE IMPENDING MONETARY NORMALIZATION ________________________________________________ 16

FINANCIAL STABILITY AND MONETARY POLICY ________________________________________________ 21

INVESTING IN RESILIENCE ________________________________________________________________________ 24

UNADDRESSED FISCAL CHALLENGES ____________________________________________________________ 31

POVERTY, PRODUCTIVITY AND GROWTH _______________________________________________________ 34

STAFF APPRAISAL _________________________________________________________________________________ 35

BOXES

1. Macroeconomic Effects of the Oil Price Decline ____________________________________________________ 7

2. A New Methodology to Estimate Potential Output and the Output Gap ___________________________ 8

3. The Impact of U.S. Dollar Appreciation—The Importance of Context______________________________13

4. Lower for Longer: Estimates of the Neutral Rate___________________________________________________20

5. Systemic Risk and Monetary Policy ________________________________________________________________22

6. Credit Cycles and The Macroeconomy ____________________________________________________________23

7. Effects of Bank Capital on U.S. Corporate Investment _____________________________________________26

8. Systemic Vulnerabilities in the Life Insurance Sector_______________________________________________30

9. Meeting Climate Pledges and Fiscal Objectives with a Carbon Tax ________________________________33

FIGURES

1. Foundation for Strong and Sustained Growth ______________________________________________________ 6

2. Muted Wage and Inflation Pressures ______________________________________________________________11

3. Changing Bank-Nonbank Interconnections _______________________________________________________12

4. A Downside Scenario _____________________________________________________________________________17

5. Potential Impact of Delayed Normalization________________________________________________________18

Approved By Discussions took place in Houston (March 25–26), New York 

(April 9–10) and Washington D.C. (May 11–20). Concluding meetings 

with Chair Yellen and Secretary Lew took place on June 1 and 3, 

respectively. The team comprised N. Chalk (head), A. Alichi,

R. Balakrishnan, S. Danninger, A. Pescatori, J. Solé, J. Turunen (all 

WHD), S. Laseen (SPR), D. Igan, H. Tong (RES) and I. Parry (FAD).

Alejandro Werner (WHD) 

and Tamim Bayoumi

(SPR)
UNITED STATES

INTERNATIONAL MONETARY FUND 3

TABLES

1. Selected Economic Indicators _____________________________________________________________________37

2. Balance of Payments ______________________________________________________________________________38

3. Federal and General Government Finances ________________________________________________________39

ANNEXES

I. Risk Assessment Matrix ____________________________________________________________________________40

II. Public Debt Sustainability Analysis (DSA) __________________________________________________________41

III. External Sector Assessment _______________________________________________________________________48

IV. Responses to Past Policy Advice __________________________________________________________________50
UNITED STATES

4 INTERNATIONAL MONETARY FUND 

Unemployment 

Rate (UR)

Quits

Layoffs

Openings

Hires

Long term UR

Invol. Part-time

U6

December 2009 Average 2005-2006 Latest

Labor Market Slack 1/

Sources: Haver Analytics; and IMF staff calculations

1/ Closer to the center signifies less labor market slack

-50

-40

-30

-20

-10

0

-50

-40

-30

-20

-10

0

France

Germany

Italy

U.S.

ECB Spillovers (two-day % change; gov. 10 yr yields)

Sources: Bloomberg; and IMF staff calculations

ECB negative 

deposit rates

(Jun. 2014)

Draghi Jackson

Hole speech

(Aug .2014)

ECB announces QE

(Jan. 2015)

ECB begins QE

(Mar. 2015)

THE MACRO OUTLOOK

1. Momentum interrupted. The U.S. economy’s momentum in the first quarter was derailed by 

unfavorable weather, a sharp contraction in oil sector investment, and the West Coast port strike. 

These developments represent a temporary drag but not a long-lasting brake on growth. 

2. Respectable growth ahead. Despite the hiatus in growth over the past few months, the 

underpinnings for a continued expansion remain in place and the outlook is for a more dynamic path 

for the remainder of the year (Figure 1). 

 A solid labor market. Labor markets have 

steadily repaired over the past year and 

several indicators suggest a jobs outlook that 

is returning to pre-crisis norms. Job growth 

has averaged about 250,000 per month over 

the past year, the unemployment rate has 

fallen to 51⁄2 percent, and real disposable 

personal income is growing above 3 percent 

year-on-year. Despite this progress, longterm unemployment, subdued participation, 

and high levels of part-time work suggest 

that the economy remains well below full 

employment.

 Accommodative financial conditions. Close 

to zero short-term rates, compressed risk 

and term premia, and an upbeat equity 

market all add up to very cheap financing 

for both consumers and firms. There is 

tentative evidence that spillovers from ECB 

actions have loosened U.S. domestic 

financial conditions, although the effects 

appear quantitatively small.

 Cheaper oil. Lower oil prices have added around 1 percent of GDP to households’ purchasing 

power since mid-2014. The evidence so far suggests this windfall has largely been saved. 

However, in the remainder of the year, the net effect on the economy is expected to be 

supportive of growth. The positive consumption effect will, though, be partly offset by 

weaker oil-related investment with crude prices falling below breakeven thresholds and 

rendering extraction unprofitable for many U.S. fields (Box 1). 

 A shrinking output gap. Unemployment has fallen close to its natural rate and capacity 

utilization rate is at the average levels seen in 2005–07. The output gap has fallen from 

1.9 percent at end-2013 to 1.4 percent by end-2014 (Box 2). Conditions are now in place for a 
UNITED STATES

INTERNATIONAL MONETARY FUND 5

2014 2015 2016 2017

Longer 

Run 2/

CBO 2.9 2.9 2.5 2.2

Consensus 3/ 2.0 2.7 n.a. n.a.

FOMC 1.9 2.6 2.3 2.2

IMF 2.4 2.8 2.6 2.0

IMF (%, annual avg. y/y) 2.5 3.0 2.7 2.0

CBO 5.5 5.4 5.3 5.5

Consensus 3/ 5.1 4.8 n.a. n.a.

FOMC 5.3 5.0 5.0 5.1

IMF 5.2 5.1 4.9 5.2

CBO 1.4 1.9 1.9 2.1

Consensus 3/ 1.3 2.0 n.a. n.a.

FOMC 0.7 1.8 2.0 2.0

IMF 0.3 1.4 1.9 2.0

CBO 1.8 1.9 1.9 1.9

FOMC 1.4 1.8 2.0 n.a.

IMF 1.2 1.6 2.0 2.0

CBO -2.2 -1.2 -0.4 -0.1 -0.5

IMF -1.4 -1.1 -0.4 -0.1 0.0

1/ CBO projections are from the Budget and Economic Outlook Jan.2015; 

FOMC projections are from the June 2015 Summary of Economic Projections; 

IMF projections are from June 10, 2015

2/ Year 2020 other than for FOMC

3/ Blue Chip Consensus, June 2015

Economic Forecasts 1/

Projections

1.4

Output Gap (percent of potential, eop)

Core PCE Inflation (percent, eop)

 PCE Inflation (percent, eop)

Unemployment Rate (percent, eop)

Real GDP Growth (percent, Q4/Q4)

2.4

5.7

1.1

gradual pick-up in real household earnings. A cyclical, albeit gradual, rise in investment by 

domestic-oriented (non-oil) businesses should be supported by sizable cash holding, upbeat 

business confidence, and an aging capital stock (Figures 1 and 2).

Growth this year is expected to be 2.5 percent. Sustained growth in the next two years should return 

output to its potential by end-2017. However, potential growth (at around 2 percent) is expected to 

be considerably weaker than pre-crisis unless a broad range of structural issues are addressed to 

raise productivity, create incentives for innovation and capital formation, and raise labor force 

participation. 
UNITED STATES

6 INTERNATIONAL MONETARY FUND 

Figure 1. Foundation for Strong and Sustained Growth

Sentiment is still optimistic... ...as the labor market sustains its positive run.

Housing activity is recovering from winter setbacks... ...as are retail and wholesale sales.

On the other hand, manufacturing has slowed... ...and the trade outlook is likely to be subdued.

Sources: Haver Analytics; and IMF staff calculations

70

80

90

100

110

90

93

96

99

102

2014M1 2014M5 2014M9 2015M1 2015M5

Sentiment Indices (SA)

Consumer confidence

(1985=100, RHS)

NFIB: small business 

optimism (1986=100)

0

1

2

3

4

5

0

100

200

300

400

500

2014M1 2014M5 2014M9 2015M1 2015M5

Labor Market

Real disposable income 

(percent yoy, RHS)

Change in nonfarm payrolls 

(SA; thousands)

4.6

4.8

5.0

5.2

5.4

0.8

0.9

1.0

1.1

1.2

2014M1 2014M5 2014M9 2015M1 2015M5

Housing Activity (SAAR; million units)

Total existing 

home sales (RHS)

Housing

starts

15

16

17

18

19

92

96

100

104

108

2014M1 2014M5 2014M9 2015M1 2015M5

Total vehicle sales (SAAR; million units, RHS)

Retail & food (excl. motor vehicles & parts dealers)

Wholesale sales of nondurable goods

Retail and Wholesale Sales (2014M1=100)

74

76

78

80

82

84

50

52

54

56

58

60

2014M1 2014M5 2014M9 2015M1 2015M5

Manufacturing Sector 

Shipments: nondefense 

capital goods 

(SA; US$ billions, RHS)

ISM manufacturing index 

(SA; >50 = increasing)

45

50

55

60

45

50

55

60

2014M1 2014M5 2014M9 2015M1 2015M5

ISM Trade Indices (SA; >50 = increasing)

New export orders

Imports
UNITED STATES

INTERNATIONAL MONETARY FUND 7

Box 1. Macroeconomic Effects of the Oil Price Decline

Oil production 

The U.S. has emerged as the world’s largest

producer with crude production almost 

doubling between 2010 and 2014 (the bulk of 

the increase driven by shale oil). Production 

should remain steady in 2015 due to the 

substantial investments of prior years. However,

given the depletion profile of existing fields, 

production is likely to decline in 2016, as the 

recent sudden stop in new investment begins to 

feed through.

Macroeconomic Impact 

The oil and gas extraction industry accounts for 

about 11⁄2–2 percent of GDP.1 During 2011–14, oil and gas investment contributed about 

21⁄2 percentage points to the level of U.S. real investment (equivalent to 0.4 percentage points of 

real GDP).

 Capital formation. Industry analysts estimate that investment in shale and tight oil 

drilling and exploration could be reduced by around 40 percent in 2015. The direct GDP 

impact is likely to be around 0.3 percentage points in 2015 (and likely frontloaded in the 

first part of the year). The effects on other industry segments—such as support activities 

and oilfield services—could make the effect modestly higher. 

 Consumption. Households should benefit from the sharp decline in gasoline prices and 

the reduction in their energy bills. Lower prices of gasoline alone will add 0.9 percent of 

GDP to household disposable income in 2015. There is a further savings of about 0.1 

percent of GDP in utility bills. So far, the evidence suggests these gains have been mostly 

saved with the personal saving rate rising to 5.6 percent in April—about one percentage 

point above its level of 6 months ago. However, in the baseline forecast this is expected to 

be temporary, as in previous episodes of sharp oil price declines. For 2015 as a whole, 

additional consumption from lower oil prices is forecast to contribute 0.6 percentage 

points to growth.

1

In North Dakota—one of the two main centers of U.S. tight oil boom (after Texas)—the sector’s share in state 

GDP is below 5 percent. Employment share of the sector in total employment is also very small (0.6 percent). 

0.0

0.4

0.8

1.2

1.6

2.0

5

6

7

8

9

10

2010 2011 2012 2013 2014 2015

U.S. Oil Production and Rig Count

Oil rig count 

(thousands, RHS)

Oil production 

(millions of barrels/day)

Sources: EIA; and Baker Hughes
UNITED STATES

8 INTERNATIONAL MONETARY FUND 

Box 2. A New Methodology to Estimate Potential Output and the Output Gap1

Previous estimates. Potential output was estimated using a multi-sector production function. 

First, for each sector data on output, employment, and capital stock was used to deduce totalfactor productivity (TFP) as a residual from a two-factor production function. Second, the resulting 

TFP series was smoothed, maximum employment was determined (using historical relationships 

between the unemployment rate and changes in the rate of inflation), and actual data on the 

capital stock were used to determine potential output. However, in recent years, this methodology 

has suggested a significant output gap that has seemed at odds with rising levels of capacity 

utilization and a rapidly repairing labor market. 

A multivariate filtering approach. The model incorporates relationships between the output gap 

and inflation (Phillips curve); the output gap and unemployment gap (Okun’s law); and an 

equation relating the output gap and the capacity utilization gap:

(Philips curve) 

 

 

 

(Okun’s law) 

(Capacity utilization) 

Where is core inflation, is the output gap, is the unemployment gap, and is the 

capacity utilization gap. The model is estimated for the U.S. using a Kalman filter and Bayesian 

techniques. 

Results. The new methodology results in a 

lower level of potential output, a broadly 

unchanged potential growth rate of 2 percent, 

larger (positive) output gaps before the global 

financial crisis, and smaller (negative) output 

gaps in the aftermath of the global financial 

crisis. In particular, the 2014 output gap is now 

estimated at -2 percent of potential GDP (rather 

than the -3.5 percent of potential GDP under 

the previous, production function based,

methodology). This is mostly due to the 

incorporation of information contained in 

inflation dynamics and the behavior of capacity 

utilization.

1 See A. Alichi, “A New Methodology for Estimating the Output Gap in the United States“, IMF Working Paper,

15/144. 

-8

-6

-4

-2

0

2

4

-8

-6

-4

-2

0

2

4

1990 1996 2002 2008 2014 2020

U.S. Output Gap (percent of potential)

New 

methodology 

Old 

methodology

Source: IMF staff estimates
UNITED STATES

INTERNATIONAL MONETARY FUND 9

0

1

2

3

4

5

0

1

2

3

4

5

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Sources: BLS; Haver Analytics; and IMF staff calculations

Unemployment 

rate gap

Part time

gap

Employment Gap (percent of population)

3. Tepid price inflation. Headline PCE inflation (at 0.1 percent year-on-year in April) is being 

temporarily dragged down by lower oil prices. Core PCE inflation (at 1.2 percent year-on-year in 

April) has faced headwinds from dollar appreciation, the falling global prices of tradable goods, and 

a residual pass-through from cheaper energy (Figure 2). Core inflation is likely to remain flat in the 

coming months, and start to rise only toward year-end, reaching the Fed’s 2 percent medium-term 

objective by end-2017. The potential for further dollar appreciation, a continued lack of wage 

dynamism, and the scope for firms to absorb cost increases into their (currently healthy) profit 

margins all pose downside risks to the inflation outlook. 

4. A mixed picture on wage inflation. The 

employment cost index has been increasing (up 

2.6 percent year-over-year in Q1) but average hourly 

earnings growth remains weak (2.2 percent year-overyear, in May). This is not surprising given the size of the 

remaining employment gap—expected to persist until 

end 2017— and evidence of a relatively flat Phillips 

curve (with slope coefficients typically estimated at less 

than 0.1). As slack is exhausted and labor markets 

repair, real and nominal wages should start to rise. 

However, the headline unemployment rate is expected 

to decline at a slow pace as part-time workers extend 

their hours and discouraged workers are drawn back into the labor market. 

5. Fiscal developments. The federal government deficit was $483 billion in FY2014 (2.8 percent 

of GDP) and is likely to move modestly lower in the current fiscal year with income tax receipts 

currently running above budget forecasts. The Bipartisan Budget Act was passed in December 2013

covering FY2014 and FY2015. Despite this progress, the U.S. faces important fiscal issues in the 

coming months:

 The Highway Trust Fund. A stop-gap measure provides spending authorization only until 

end-July. This is the 33rd short-term patch to surface transportation funding over the past six 

years. The uncertainty of prospects for the fund is believed to be negatively impacting statelevel infrastructure spending.

 The Affordable Care Act. Legal uncertainties around healthcare were highlighted when the 

Supreme Court agreed to hear a lower court case on whether enrollees in federally-run 

health exchanges are eligible to receive public subsidies. The Supreme Court is expected to 

provide an opinion by end-June. If it were to find against the government, millions of 

enrollees in more than 30 states could be affected, impacting access to healthcare and the 

ability to pool insurance risks.

 The federal debt limit. The suspension of the debt limit ended on March 15. The Treasury has 

some headroom created by cash planning and extraordinary measures but, without 

legislative action, the debt limit is likely to become a binding constraint towards the end of 

the year.
UNITED STATES

10 INTERNATIONAL MONETARY FUND 

80

100

120

140

160

80

100

120

140

160

1980 1985 1990 1995 2000 2005 2010 2015

Real Effective Exchange Rate (index, 2010=100)

ULC based

CPI based

Source: IMF staff estimates

6. External outlook. The real appreciation of the U.S. dollar has been rapid and a product of 

cyclical growth divergences, different trajectories for monetary policies among the systemic 

economies, and a portfolio shift toward U.S. dollar 

assets (Box 3). Lower oil prices and increasing 

energy independence have combined to contain 

the U.S. current account deficit. Nevertheless, over 

the medium term, at current levels of the real 

exchange rate, the current account deficit is 

forecast to rise toward 31⁄2 percent of GDP. The

current level of the U.S. dollar is assessed to be 

moderately overvalued. The 2014 current account 

deficit is around 0–11⁄4 percent of GDP above the 

level consistent with medium-term fundamentals 

and desirable policies (see Annex III. External Sector 

Assessment).

7. Global spillovers from a sustained dollar appreciation. Many emerging and low-income 

economies have lowered their vulnerability to U.S. dollar appreciation. Nevertheless, large gross 

dollar funding positions could pose vulnerabilities for some. The rise in U.S. dollar debt issued by

highly leveraged corporates in emerging economies is a notable source of risk (see the 2015 

Spillover Report).

8. Risks to financial stability. At this point, the data suggest a system that has pockets of 

vulnerabilities rather than one containing broad-based excesses. Nevertheless, these vulnerabilities 

cannot be ignored. Credit risks have risen, underwriting standards are weakening, and an increasing 

volume of funds is flowing to lower-rated companies. Equity market valuations, by a number of 

metrics, are on the high side (although not extreme relative to historical patterns). The more serious, 

macro-relevant sources of risk to financial stability are linked to: 

 The migration of intermediation to the nonbanks where there is less visibility on the size and 

nature of the embedded risks and fewer regulatory and supervisory tools to manage those 

risks (Figure 3).

 The potential for insufficient liquidity in a range of fixed income markets which could lead to 

abrupt moves in market pricing, particularly if there were to be a large rebalancing of asset 

allocations. The causes of, and solutions to, such market liquidity risks are still imperfectly 

understood.

 Insurers have taken on greater market risk. Stress tests show that under severe but plausible 

downside scenarios a large part of the industry—particularly life insurers—could be faced 

with negative shareholder equity if firms were forced into fire sales.

However, several factors mitigate these downsides. The U.S. banking system has strengthened its 

capital position (Tier 1 capital as a ratio of risk-weighted assets is 13 percent) and appears resilient to 

a range of extreme market and economic shocks (as evidenced by the recent Comprehensive Capital 

Analysis and Review results and echoed by the FSAP stress tests). In addition, overall leverage does 
UNITED STATES

INTERNATIONAL MONETARY FUND 11

Figure 2. Muted Wage and Inflation Pressures

ULC growth in the manufacturing sector has been close to 

zero over the past two years...

...and nominal wage growth has been a little above 2 

percent.

There is marked sectoral variation, with wages strongest in 

some service sectors and weakest in manufacturing.

Profit shares have been increasing and have room for 

compression.

Core inflation remains contained...

...and non-housing service inflation is declining while 

goods inflation remains negative.

Sources: BLS; Haver Analytics; and IMF staff calculations

1/ With inventory valuation adjustment (IVA), before tax

-3

0

3

6

-3

0

3

6

2011 2012 2013 2014 2015

Unit Labor Costs (percent, yoy)

Nonfarm 

business sector

Manufacturing

sector

Pre-crisis

average

0

1

2

3

4

0

1

2

3

4

2008 2009 2010 2011 2012 2013 2014 2015

Wage Growth (percent, yoy)

Employment 

cost index

Average hourly 

earnings

0

1

2

3

4

0 1 2 3 4

Earnings Growth Across Sectors (percent)

Transportation &

warehousing

Manufacturing

Construction

Financial

Professional & 

business srvcs.

Average over last year 

Education & 

health

IT

Wholesale

trade

Leisure & 

hospitality

Retail trade

Other 

services

Trade, transportation,

& utilities.

Pre-crisis average

-2

0

2

4

6

8

-2

0

2

4

6

8

2004 2006 2008 2010 2012 2014

Corporate Profits 1/ (share of GNP)

Nonfinancial,

nonmanufacturing

Manufacturing

Financial

0

1

2

3

4

0

1

2

3

4

2008 2009 2010 2011 2012 2013 2014 2015

Core Inflation (percent, yoy)

FRB Cleveland 

median CPI

FRB Cleveland

trimmed mean CPI

Core CPI

Core PCE

-1

0

1

2

3

-1

0

1

2

3

2008 2009 2010 2011 2012 2013 2014 2015

Services excl. housing Housing

Goods Core PCE

Contributions to Core PCE (ppts, yoy)
UNITED STATES

12 INTERNATIONAL MONETARY FUND 

Figure 3. Changing Bank-Nonbank Interconnections

Financial system assets continue to grow. The sizes of interconnections within the financial system 

have become smaller since 2008.

Banks are slowly restarting their lending to households... ...but nonbank credit to households has dropped sharply 

as the securitization model contracted.

Nonbanks have reversed their net indebtedness to 

nonresidents.

Life insurers continue to adapt their portfolios, partly in 

response to the low interest rate environment.

Sources: Financial Flows of the United States; FRB; Haver Analytics; and IMF staff calculations

0

20

40

60

80

0

20

40

60

80

1990 1993 1996 1999 2002 2005 2008 2011 2014

Total Assets (US$ trillions)

Banks

Nonbanks

0

5

10

15

20

0

5

10

15

20

1990 1993 1996 1999 2002 2005 2008 2011 2014

Bank and Nonbank Claims (percent of GDP)

Nonbank credit

to banks

Bank credit 

to nonbanks

15

20

25

30

35

15

20

25

30

35

1990 1993 1996 1999 2002 2005 2008 2011 2014

Bank Credit (percent of GDP)

Bank credit

to businesses

Bank credit 

to households

20

30

40

50

60

20

30

40

50

60

1990 1993 1996 1999 2002 2005 2008 2011 2014

Nonbank Credit (percent of GDP)

Nonbank creditto 

nonfinancial businesses

Nonbank credit 

to households

-3

-2

-1

0

1

2

3

-20

-10

0

10

20

2000 2002 2004 2006 2008 2010 2012 2014

External Credit Position of Nonbanks 

(percent of GDP)

Net external shortterm credit position 

of nonbanks, RHS

Net external 

credit position

of nonbanks

0

20

40

60

80

100

0

20

40

60

80

100

1970 1981 1992 2003 2014

Portfolio of Life Insurance Sector 

(percent of total financial assets)

Other credit mkt instruments

Other

Equities, ETFs, and 

mutual funds

Treasury & 

Agency 

Mortgages Securities

Corporate and 

foreign bonds
UNITED STATES

INTERNATIONAL MONETARY FUND 13

Box 3. The Impact of U.S. Dollar Appreciation—The Importance of Context

Drawing on a multi-country GIMF model, calibrated for the U.S., the impact of a stronger dollar is 

shown to depend highly on the underlying circumstances that generate the appreciation. Three 

potential scenarios illustrate the importance of general equilibrium effects:

 Permanently higher U.S. shale oil productions. An anticipated increase in shale oil 

production that is large enough to create a 5 percent appreciation of the exchange rate 

results in a boost to domestic demand and causes non-oil imports to increase (although 

exports decline as a result of the appreciation). Over the medium term, there would be a 

deterioration in the U.S. current account balance and a rebalancing of the sources of 

growth toward domestic demand. 

 Structural slowdown in Japan and Europe. In general, higher expected growth in the U.S. 

relative to trading partners—even after accounting for expected monetary policy 

tightening in the U.S. and easing in trading partners—tends to have a relatively small 

effect on currencies, particularly since countries are at zero interest rates. However, a 

significant slowdown in trading partners (that would be large enough to lead to a 

5 percent appreciation), would initially knock around 1⁄2 percentage point off of growth 

and raise the current account deficit by around 3⁄4 percent of GDP. However, the resulting 

lower global oil prices and greater capital inflows into the U.S. would, over a longer 

horizon actually boost growth.

 A temporary but persistent portfolio preference shift. Increased inflows into U.S. dollar 

assets have a large and immediate effect on the exchange rate and can lead to a 

loosening of domestic financial conditions (as equity prices rise and bond yields fall). 

Looser financial conditions support domestic demand, drawing in more imports and 

causing a decline in the current account of close to 1 percent of GDP. Over time, the 

dollar appreciation unwinds but domestic demand effects persist causing the overall

growth effect to eventually turn positive.

Impact of 5 percent Stronger Dollar (Percent difference in levels from baseline)

—— GDP (% points annualized) ----- Core inflation (% points annualized) —— Current account (% of GDP)

Source: IMF staff estimates

-1

0

1

-1

0

1

2014 2015 2016 2017 2018

Permanent Shock due to Shale

-1

0

1

-1

0

1

2014 2015 2016 2017 2018

Structural Slowdown in Japan/Europe

-1

0

1

-1

0

1

2014 2015 2016 2017 2018

Shift in Portfolio Preferences
UNITED STATES

14 INTERNATIONAL MONETARY FUND 

5

6

7

8

9

10

3

4

5

6

7

t-2 t-1 t t+1 t+2 t+3 t+4 t+5 t+6

Staff proj.

t = 2014Q3

t = 1997Q4

t = 1985Q4 (RHS)

Personal Savings Rate Dynamics After Oil Price 

Drops (percent)

Sources: Haver Analytics; and IMF staff estimates

Time 't' is the

quarter 

immediately 

preceeding

a 25% q/q oil 

price drop

not appear excessive, household and corporate balance sheets look generally healthy, and credit 

growth has been modest.

RISKS TO STRONG AND SUSTAINED GROWTH

9. A further strengthening of the U.S. dollar. A prominent risk to the outlook is that the 

currency will continue appreciating due to sustained cyclical divergences and capital flows into U.S. 

dollar assets. If so, the U.S. external position would be pushed further away from levels justified by 

medium-term fundamentals and growth could be significantly debilitated. Although the context 

would be important, if the U.S. currency were to move into the range where it could be described as 

substantially overvalued—with a current account deficit heading toward 5 percent of GDP—this 

would likely point to the move in the dollar having gone “too far”, potentially creating future risks, 

including in some emerging market economies, as global imbalances reassert themselves.

10. Uncertainty surrounding the effect of 

lower oil prices. The rise of the household saving 

rate in the first four months of this year could 

have been for temporary reasons: poor weather 

and uncertainty about the duration of oil 

windfalls. The baseline outlook assumes that these 

effects will wane as lower energy prices start to 

feed into better consumption and higher non-oil 

investment. Because low-income households, 

which benefit the most from declines of pump 

prices, have still weak balance sheets (having 

benefited less from mortgage refinancing and the 

equity and property price increases) much of the 

oil windfall this time could be used for debt 

reduction. The demand effect would be further 

compromised if current low oil prices are seen as a 

temporary phenomenon. As a further growth 

downside, the size of oil industry capital spending 

retrenchment could be larger than is currently 

estimated, a fact that was vividly underlined by the 

recent decline in oil drilling activity. On the other 

hand, a potential upside is that there could be an 

even bigger decline in the future personal savings 

rate than is projected in the baseline, consistent 

with previous episodes of steep oil price declines. 

11. The potential for uninspiring business investment. Non-oil, non-residential investment 

has been well below rates in previous recoveries (even before the rise in the dollar and in spite of 

healthy balance sheets and an aging capital stock). Corporations are using cash holdings for share 

0

2

4

6

8

10

12

14

70

75

80

85

90

95

< 20 20-40 40-60 60-80 80-100

Net Worth and Oil Expenditures by Income Quintile

Household expenditure 

on oil and fuel

(percent of income, RHS)

Mean family net worth, 2013

(index in 2013 dollars, 2007=100)

Sources: Haver Analytics; and IMF staff calculations
UNITED STATES

INTERNATIONAL MONETARY FUND 15

-40

0

40

80

120

160

200

-40

0

40

80

120

160

200

1995 2000 2005 2010 2015

Household Formation (12MMA, thousands)

Source:s Haver Analytics; and IMF staff calculations

Pre-crisis average

buybacks and merger and acquisition activity to lessen tax liabilities (rather than for capital 

formation). The underlying reasons for low business investment are not well understood, and could 

be related to the decline in productivity or the rise of capital-economizing innovations. A shift of 

demand to labor-intensive services, as the U.S. population ages, is another candidate explanation. A 

more benign explanation is that firms simply need to be more confident regarding future expected 

demand (consistent with the findings of the Spring 2015 WEO, which argues that much of the 

investment decline can be explained by a simple accelerator model).

12. A new long-term housing equilibrium. Housing market activity has struggled to recover. 

Up until recently, household formation has been depressed despite the potential for pent-up 

demand from demographics and more secure job prospects. The slow return of millennials to the 

first-time home buyers market could signal a preference shift away from traditional suburban, 

owner-occupied housing. Indeed, the urban rental market remains strong which could represent an 

enduring increase in demand for multi-family housing units with a smaller square footage. If true, 

this would permanently lower the steady state 

growth contribution from residential construction. 

A less concerning interpretation comes from 

household surveys, which suggest that attitudes to 

home ownership haven’t changed much: most 

renters would prefer to own if they had the 

necessary financial resources. If that were true, once 

the job market improves further and millennials 

have paid off some of their student loans (which 

have grown to over US$1 trillion or 71⁄2 percent of 

GDP), the demand for housing could quickly revert 

to previous norms, with an accompanying step-up 

in residential investment.

13. The debt ceiling, redux. With the debt limit becoming binding towards the end of the year, 

down-to-the-wire brinkmanship over fiscal policy could create excessive bond market volatility, 

particularly as the political ground is prepared for the 2016 presidential election. This would 

undermine confidence, as it has in the past, but could create a more complex if the timing coincides 

with a Fed lift-off or an unpredictable external shock.

14. A less-than-smooth rise in rates. The Fed’s first rate increase in almost nine years has been 

carefully prepared and telegraphed. Nevertheless, regardless of timing, higher U.S. policy rates could 

still result in a significant and abrupt rebalancing of international portfolios with market volatility and 

financial stability consequences that go well beyond U.S. borders. Even without policy changes, 

higher inflation numbers unaccompanied by better activity data could lead to a sudden upward shift 

in the yield curve or risk spreads. In either case, a shift in expectations about the future pace of rate 

increases could create flows into U.S. dollar assets and a further meaningful appreciation of the 

dollar. Similarly, anxiety around a tightening cycle—even if accompanied by a strong underlying 

economy—could create a sell-off in equities or riskier fixed income assets. Such asset price volatility 

could last more than just a few days and have larger-than-anticipated negative effects on financial 
UNITED STATES

16 INTERNATIONAL MONETARY FUND 

conditions, growth, labor markets, and inflation outcomes. Spillovers to economies with close trade 

and financial linkages could be substantial.

15. Negative inward spillovers. Continued weakening of growth in the rest of the world could 

suppress U.S. exports and investment in tradable sectors. Weaker global growth or a pronounced 

China slowdown, alongside a stronger dollar, would also weaken profits of U.S. multinationals and 

could trigger a re-pricing of equity valuations (with the attendant harm to U.S. consumption via 

wealth effects). Finally, risks from Russia/Ukraine, Greece or the Middle East represent an 

unpredictable wild card with negative, but difficult to quantify, effects for the U.S. 

16. Authorities’ views. Weak growth in the first quarter was seen as a temporary setback. The 

recovery was expected to resume given a still strong labor market, but the rebound is likely being 

weakened by headwinds from a strong dollar, weak global growth, and possibly greater caution 

among households and businesses. Uncertainty remains about the strength of the housing recovery, 

despite recent improvements, but there have been policy efforts to increase mortgage availability 

and support first-time home buyers. The rapid rise in student debt was a cause for concern but 

efforts are being made—including the pay-as-you-earn plans that cap student loan payments at 

10 percent of discretionary income—to lessen default risks. While not taking a view on the level or 

future direction of the U.S. dollar, there was a general recognition that the different cyclical positions 

of the largest economies would influence currency markets. However, the authorities noted that what 

is needed at a global level is increased efforts in enhancing total demand, not a shifting of demand 

between countries that was facilitated by movements in exchange rates. To achieve that increased 

global demand, the policy recipes differed from country to country. However, the U.S. could not be 

seen as a sponge for the whole global economy, absorbing their production through U.S. imports.

THE IMPENDING MONETARY NORMALIZATION

17. An uncertain backdrop. The U.S. economy remains below potential, wage and price 

pressures are expected to remain low, and inflation expectations appear well-anchored. Nonetheless, 

the decision on the timing and pace of policy rate increases is complicated by significant 

uncertainties surrounding the resilience of future economic growth, the remaining distance to 

maximum employment, and the current level and future path of the “neutral” fed funds rate (Box 4). 

Although financial conditions remain accommodative, monetary conditions are being tightened 

somewhat by the appreciation of the dollar. Furthermore, the fragility of U.S. growth has been 

repeatedly underlined with the momentum being disrupted by weather, concerns about Europe, and 

political stand-offs over the budget and debt limit. Any move to normalize monetary policy, 

therefore, needs to be approached cautiously.
UNITED STATES

INTERNATIONAL MONETARY FUND 17

0

1

2

3

4

5

0

1

2

3

4

5

2015M6 2016M6 2017M6 2018M6 2019M6

IMF staff

projections

Policy Rates Expectations (percent)

Sources: Federal Reserve; Bloomberg; and IMF staff estimates

1/ June 17, 2015 for FOMC and Fed funds. April 2015 for Primary Dealers

Primary Dealers Survey 1/ 

(25-75 percentile range)

FOMC Summary of 

Economic Projections 1/

(median)

Fed funds 

futures path 1/

18. Complex macroeconomic policy trade-offs. Staff’s baseline macro forecasts (Table 1) 

embed an assumption—based on current market 

expectations—that rates rise from zero in the 

second half of 2015, followed by a shallow path 

upward over the next few years toward a long-term 

fed funds rate of 3.5 percent. However, the 

uncertainties are large—the size of the output gap, 

the natural rate of unemployment, the neutral 

policy rate, and the path for inflation and wages—

and there are pros and cons of moving in line with 

this baseline or in deferring the path of rate 

increases. Weighing the net benefits involves an 

evaluation of uncertain risks and difficult tradeoffs.

The balance of risks to be considered includes:

 Raising rates too early could trigger a greater-than-expected tightening of financial 

conditions due to some combination of a further upward swing in the U.S. dollar, lower 

equity prices, and/or a repricing of risk premia and the yield curve. Of course, much of this 

would depend on financial market reactions to the policy move. However, there is a risk that 

the tightening impact on the economy could go well beyond the initial 25bp increase in the 

fed funds rate, creating a risk that the economy stalls (Figure 4). This would likely force the 

Fed to reverse direction, moving rates back down toward zero—as the ECB and the Riksbank 

did in 2011 and Japan did repeatedly in the 1990s and 2000s—with potential costs to 

credibility.

Figure 4. A Downside Scenario 1/

If financial conditions were to tighten abruptly shortly 

after Fed lift-off, there is a risk the economy could stall 

in early-2016, reopening the output gap, driving core 

inflation back down toward 1 percent ...

...and requiring policy rates to return to zero by late 

2016.

Source: IMF staff estimates

1/ The downside scenario assumes a tightening of financial conditions – through equity prices, the exchange rate, or term and 

risk premia – that is equivalent to a rise in long-term interest rates of 150 bps for 4–6 quarters.

-4

-3

-2

-1

0

1

2

-4

-3

-2

-1

0

1

2

2015Q1 2016Q1 2017Q1 2018Q1

Inflation and Output Gap (percent)

Core PCE Inflation (yoy)

Output Gap

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

2015Q1 2016Q1 2017Q1 2018Q1

Fed Funds Rate (percent, annualized)

Nominal

Real
UNITED STATES

18 INTERNATIONAL MONETARY FUND 

 Raising rates too late could require a more rapid path upward for policy rates due to an 

acceleration of inflation, with negative consequences for financial market volatility and the 

macroeconomy. Such a rapid policy rate increase was seen in 1994 when, after an initial 25bp 

move, higher-than-expected inflation caused the Fed to accelerate the pace of rate increases 

and 10-year yields rose about 200bp over the course of the next 12 months. 

19. Staff’s view. Given the balance in the likelihood and severity of these two-sided risks, there 

is a strong case for waiting to raise rates until there are more tangible signs of wage or price inflation 

than are currently evident. Inflation inertia, firmly anchored expectations, Fed credibility, and 

evidence of a relatively flat relationship between inflation and slack all suggest that a sudden 

acceleration in wages or prices (as in 1994, when headline CPI inflation rose 0.7 percent between 

May and September) is unlikely. Global disinflationary trends (e.g. in commodities and tradable 

goods) and the pass-through from the strengthening dollar are also likely to act as important 

dampening forces to inflation. A later increase in rates could imply a faster pace of rate increases 

thereafter and may create a modest overshooting of inflation above the Fed’s medium-term goal 

(perhaps up toward 21⁄2 percent, see Figure 5). However, deferring rate increases and proceeding 

gradually thereafter would provide valuable insurance against the risks from disinflation, policy 

reversal, and ending back at a zero fed funds rate. If data evolves in line with staff’s macroeconomic 

forecasts, and barring upside surprises to growth or inflation, such a policy would imply keeping the 

fed funds rate at 0–0.25 percent into the first half of 2016 with a gradual rise in the federal funds rate 

thereafter. Of course, first and foremost, policy should remain data dependent, looking at a broadrange of available indicators and forecasts. This would mean that if either wage or price inflation 

were to become more visible at an earlier stage than is embedded in staff’s forecasts, interest rates 

should be raised on a more accelerated timetable.

Figure 5. Potential Impact of Delayed Normalization

A delayed but subsequently steeper 

path for policy rates.

Leads to inflation temporarily and 

modestly exceeding the mediumterm goal.

But facilitates a faster return to 

full employment.

Sources: IMF staff estimates

Note: These simulations are not the same as the staff’s baseline forecasts but rather are to illustrate the differences between an 

optimal loss function approach to setting interest rates versus a reaction function approach (i.e., Taylor rule). For details, see A. 

Alichi et al, “Avoiding Dark Corners: A Robust Monetary Policy Framework for the United States”, IMF Working Paper, 15/134. 

0

1

2

3

4

0

1

2

3

4

2014Q4 2016Q4 2018Q4 2020Q4

Fed Funds Rate (percent)

Reaction

function

Optimal 

(loss function)

1.2

1.4

1.6

1.8

2.0

2.2

2.4

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2014Q4 2016Q4 2018Q4 2020Q4

Reaction 

function

Optimal 

(loss function)

Core Inflation (percent yoy)

-2

-1

0

1

-2

-1

0

1

2014Q4 2016Q4 2018Q4 2020Q4

Output Gap (percent of potential)

Reaction 

function

Optimal 

(loss function)
UNITED STATES

INTERNATIONAL MONETARY FUND 19

20. Communication at a premium. The Fed has laid the groundwork for an increase in policy 

rates, going a considerable distance in providing clarity about its data-driven decision making 

process. Of course, the Fed is unable to provide certainty about its intentions but as the first rate hike 

approaches and monetary policy normalization proceeds, there will continue to be a premium on 

effective communication about the expected path of increases in policy interest rates ahead. In this 

context, past Fund advice—to schedule a press conference by the Fed chair after every FOMC 

meeting and to publish a quarterly monetary policy report that details economic projections that are 

endorsed by the FOMC—bears repeating. Adding more communication tools will undoubtedly run 

into practical implementation challenges, but still merits consideration given the potential benefits.

21. Global spillover considerations. Higher interest rates that are driven by a robust economy 

moving closer to maximum employment should be a positive force for other countries. The effects 

from stronger demand outweigh the dampening effects of tighter global financial conditions, 

particularly if countries allow their exchange rates to respond flexibly. However, an increase in yields 

in a weaker growth environment (e.g. precipitated by a pickup in inflation or an unexpected market 

re-pricing of risk premia) could lead to higher sovereign and corporate spreads, volatile capital flows, 

falling asset prices, and a drag on partner country growth. Effects would differ across countries and 

regions but, in a downside scenario, emerging and frontier market economies with weaker 

fundamentals are likely to be the most exposed (see 2015 Spillover Report). 

22. Authorities’ view. The course of monetary policy will be determined by the path of 

incoming data and what that reveals about the economy. The U.S. economy appears well positioned 

for continued growth and inflation is expected to move gradually up toward 2 percent as the 

economy strengthens further and as transitory negative influences wane. At this stage, the decision 

to raise rates depends on whether policy makers see the recovery as sufficiently strong to generate 

continued improvement in labor conditions, and whether they are reasonably confident that inflation 

will move back towards the Fed’s inflation objective. Also, while the timing of the first rate hike was 

receiving a lot of attention, the path of subsequent policy rate changes was of greater importance 

and, on that, the authorities emphasized the pace of normalization was likely to be gradual. Effective 

communication was seen as critical. However, the authorities saw little benefit from more press 

conferences and emphasized that they have multiple alternative avenues of communication, 

including speeches, publications, and congressional testimony. They also emphasized the practical 

challenges that would be involved in building consensus around an FOMC endorsed forecast, given 

the size of the FOMC and varying views among members.
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20 INTERNATIONAL MONETARY FUND 

-4

-2

0

2

4

6

-4

-2

0

2

4

6

1984 1990 1996 2002 2008 2014 2020

Shadow neutral rate

Neutral Rate

Neutral Rates (percent)

FOMC median LT rate

Source: IMF staff estimates

-8

-6

-4

-2

0

2

4

6

-8

-6

-4

-2

0

2

4

6

1984 1988 1992 1996 2000 2004 2008 2012 2016 2020

Rate Gap

Shadow Rate Gap

Rate Gaps (percent)

Source: IMF staff estimates

Box 4. Lower for Longer: Estimates of the Neutral Rate1

Framework.To better assess current monetary policy stance, a semi-structural model is used to estimate 

the neutral rate for the U.S.2The model incorporates relationships between output gap and interest rates 

gaps (IS equation), inflation and the output gap (Phillips curve); and an equation that links the neutral rate 

to potential output growth plus other exogenous factors:

(IS equation) 

 

  

 

 

(Phillips curve) 

 

 

  

 

(Neutral rate) 

 

Where is the output gap; r is the real (policy) interest rate, r

n

is the neutral rate, is core inflation; π

m

, πo

are import and oil price shocks, respectively, g is potential output growth, z is an exogenous autoregressive 

process, and 

 

 

 

are shocks. Bayesian estimation of the model incorporates prior information on the 

output gap and potential output (based on a production function approach) and accounts for 

unconventional monetary policies at the zero lower bound by using estimates of “shadow” policy rates. 

The neutral rate turned negative during the 

global financial crisis . Model estimates show that 

the neutral real rate has fallen steadily over time and 

was likely negative subsequent to the global financial 

crisis. The fall in neutral rates is driven by a decline in 

trend potential output growth, a rise in global 

savings and an increase in the equity premium. 

Policy continues to be accommodative. Interest 

rate “gaps” (i.e. deviations between actual real policy 

rates and estimated time-varying neutral rate) show 

that unconventional policies were needed in 2008–09 

to make policies sufficiently loose to address the 

large output decline—the negative rate gap 

calculated using shadow policy rates suggests that policies have been highly accommodative for the past 

six years. 

The neutral rate is projected to increase slowly.

Conditional on the staff’s medium-term forecast for 

output, inflation and policy rates, model based 

projections point to a very slow increase in the 

neutral rate in the years ahead. At a five year horizon, 

even though the output gap has closed the neutral 

rate is likely to be well below the FOMC participants’ 

median forecast for the long-term real policy rate (of 

about 1.75 percent). As a result, even if policy rates 

begin gradually rising in the second half of 2015 (as 

in staff’s forecast, see paragraph 18) monetary policy 

would remain accommodative (i.e. with actual policy 

rates below the neutral rate) until late 2016.

1

See Pescatori, A. and Turunen, J., “Lower for Longer: Neutral Rates in the United States”, IMF Working Paper, 15/135.

2

Laubach, T. and Williams, J. (2003): “Measuring the Natural Rate of Interest”, Review of Economics and Statistics 85(4).
UNITED STATES

INTERNATIONAL MONETARY FUND 21

FINANCIAL STABILITY AND MONETARY POLICY

23. Financial stability and monetary policy. Even if justified from a macroeconomic 

perspective, there is a concern that maintaining policy rates at close to zero for too long will give rise 

to increased financial risk-taking and a higher probability of future crisis. Is there a case, then, for 

pursuing more aggressive increases in policy rates—relative to that which would be warranted by the 

inflation-employment outlook alone—to “lean against the wind” and lessen future financial stability 

concerns? 

24. The pros: theoretical support in several recent studies. The academic literature suggests 

that if monetary policy reacts to emerging signs of financial excess, it could raise welfare—foregoing 

some amount of employment gains but lessening the probability of financial instability events that 

carry a high economic cost (see Box 5 and, for example, Woodford, 2012 and Ajello et al, 2015)1. This 

suggests that monetary policy could be a sensible tool if other, more targeted, options are 

unavailable. There is little theoretical support, however, for nonsystematic policies that wait for 

financial vulnerabilities to rise and then use interest rates to try and “prick the bubble”. 

25. The cons: implementation challenges and an imperfect understanding of policy 

transmission. In the U.S. case, risks are shifting from the banks to the nonbanks posing challenges in 

both identifying and tackling systemic risks. At the same time, there has been little experience in 

using monetary policy to address financial stability concerns. This poses challenges for the use of 

both interest rate and macroprudential policy in tackling potential financial instability (see Stein, 

2014)2. Policymakers may find it difficult to systematically identify and measure rising financial 

excesses, in a timely manner, in order to react to them. Also, the transmission mechanism from 

changes in policy rates to underlying financial risks may not be well understood. Preliminary results, 

for example, suggest that rate hikes succeed in lowering the growth in credit to households but shift 

the composition of the originators of that credit toward nonbanks (Box 6). 

26. Staff’s view. At this stage, policy rates should not be used in an effort to either reduce 

leverage or dampen financial stability risks. Instead, efforts should be targeted toward strengthening 

the macroprudential framework, developing regulatory tools, and addressing gaps in regulation and 

supervision. There is clearly, though, an active debate on the role of monetary policy in addressing 

financial stability risks in both academic and policy circles. The authorities should give priority to 

understanding how this would apply in the context of the complex U.S. financial system, accelerating 

research on the theoretical and empirical nexus between interest rate changes and financial 

vulnerabilities and working to identify appropriate measures of the financial cycle.

 

1 M. Woodford, “Inflation Targeting and Financial Stability, NBER Working Paper 27967, 2012 and A. Ajello, T. Laubach, 

D. López-Salido, and T. Nakata, “Financial Stability and Optimal Interest Rate Policy” Federal Reserve Board, 2015. 

2

J. Stein, “Incorporating Financial Stability Considerations into a Monetary Policy Framework”, speech at the 

International Research Forum on Monetary Policy, 2014.
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22 INTERNATIONAL MONETARY FUND 

0.0

0.4

0.8

1.2

1.6

0.0

0.4

0.8

1.2

1.6

0.0 0.1 0.2 0.3

Source: IMF staff estimates

Note: Welfare is measured in terms of consumption relative baseline with no 

reaction to leverage. X-axis is relative importance of leverage in policy rules

Monetary Policy 

Macroprudential

Welfare Gains (percent)

Box 5. Systemic Risk and Monetary Policy1

Analytical framework. A non-linear DSGE model (that has reasonable macro and asset pricing properties, 

an explicit intermediation system, and endogenous variation in systemic risk) allows for a joint analysis of 

monetary policy and financial stability risks.2

Results. The main findings provide insights about the optimal conduct of monetary policy in the context 

of time-varying and endogenously determined risk premia and systemic risk:

 Financial variables (i.e. financial leverage or risk premia) contain information about the state of the 

economy that is potentially useful for conducting monetary policy. 

 Nonsystematic monetary policy that reacts to financial risks is likely to raise, not lower, risks. An 

unanticipated policy tightening, especially when the financial system is already fragile or leverage 

is high, increases the probability of crisis. 

 Relatively simple, systematic policy rules 

that aim to stabilize inflation, the output 

gap, and measures of systemic risk (e.g. 

cyclical leverage or mispricing of risk) can 

yield welfare improvements relative to 

those policy rules that focus only on 

stabilizing inflation and the output gap. 

Incorporating such financial stability 

concerns would imply incrementally 

moving the policy rate higher by relatively 

small amounts to lessen the build-up of 

vulnerabilities. 

 However, such simple rules can be counterproductive when the economy is hit by a large negative 

real shock that induces a fall in asset prices and increases the probability of crisis. This argues for 

more complex policy responses, particularly in the face of large and negative real shocks.

 The welfare improvement result requires that:

 The central bank can measure systemic risks with some accuracy (e.g. the mispricing of risk). 

 Leverage is pro-cyclical. Empirical evidence suggests that this is the case for some sectors, 

(e.g. for broker-dealers and, to some extent, large commercial banks) but not necessarily for 

all sectors at all times.

 The potential welfare gains from monetary policy leaning against systemic risks are smaller than 

an effective and targeted countercyclical macro-prudential policy, in part because the optimal 

degree of tightening through interest rate policy is limited by traditional employment-inflation 

tradeoffs.

3

1

S. Laseen, A. Pescatori, and J. Turunen, “Systemic Risk: A New Trade-off for Monetary Policy?” IMF Working Paper, 15/142.

2

The model builds on Dewachter and Wouters (2014), which embeds endogenous financial risk (He and Krishnamurty, 2014) 

into a DSGE model used for monetary policy analysis. A prominent extension here is that the model allows financial sector 

leverage to be procyclical, in line with empirical evidence (see Adrian and Shin, 2014).

3 Macroprudential policy is modeled as a countercyclical tax on leverage, similar to a countercyclical capital requirement.
UNITED STATES

INTERNATIONAL MONETARY FUND 23

0.0

0.2

0.4

0.6

0.8

1.0

0

5

10

15

20

25

GDP households nonfinancial 

businesses

banks nonbanks households nonfinancial 

businesses

banks nonbanks

Bank credit to Nonbank credit to

Average cycle duration (years)

Synchronization Ratio with GDP (RHS) 1/

Source: IMF staff estimates

1/ The ratio of number of observations where GDP and credit are in the same phase divided by total observations , for the period 1980-2014

Business and Credit Cycles

Box 6. Credit Cycles and The Macroeconomy

An analysis of the U.S. Financial Accounts reveals important information about the financial cycle1:

 Bank and non-bank credit to the 

private sector—particularly to 

households—have longer cycles than 

the business cycle.

 Intra-financial sector credit cycles 

(bank-to-bank and bank-tononbank) appear to be shorter than 

the business cycle. 

 Non-bank credit is more pro-cyclical 

than bank credit (i.e., with a higher 

synchronization ratio).

 Credit to banks (either from other banks or from nonbanks) is the least synchronized with the 

macroeconomic cycle. 

 A VAR analysis shows that the growth in credit to households is lowered as policy rates rise. 

However, the compositional effects are important with the contraction in bank lending being 

partially offset by an expansion in nonbank credit to households.

 The different reaction of banks and nonbanks to a rates shock is symptomatic of the interconnected 

nature of the U.S. financial system. Faced with a tighter liquidity environment, banks may rely on 

securitizations and other financial innovations to turn illiquid assets into liquid funds which could, in 

turn, lead to a migration of credit to nonbanks. 

 The procyclicality of nonbank credit stresses the need to strengthen the resilience of both bank and 

nonbank system in upswings. Measures to boost nonbank resilience go beyond enhanced capital 

and liquidity standards and could include margin or haircut requirements as well as others tools.

Impact of +100 Basis Points Fed Funds Shock 

1

See A. Herman, D. Igan and J. Solé “The Macroeconomic Relevance of Credit Flows: An Exploration of U.S. Data” 

IMF Working Paper, 15/143.

-0.3

-0.2

-0.1

0.0

-0.3

-0.2

-0.1

0.0

0 4 8 12 16 20

Period

Impact on growth of bank credit to 

households (percentage points)

Source: IMF staff estimates

-0.1

0.0

0.1

0.2

0.3

-0.1

0.0

0.1

0.2

0.3

0 4 8 12 16 20

Period

Impact on growth of nonbank credit to 

households (percentage points)

Source: IMF staff estimates
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24 INTERNATIONAL MONETARY FUND 

27. Authorities’ view. Intensive efforts are being made at the Federal Reserve and elsewhere to 

examine the impact of using interest rate policy to reduce the risk of future bouts of financial 

instability. However, the state of understanding of how such a policy might affect the economy and 

the nature of the underlying trade-offs involved is still at a nascent stage. As such, “the jury is still 

out” on whether such a policy would be advisable in the U.S. context. Also, the current level of 

financial risks was seen as moderate and there are other tools available to manage emerging risks 

(such as countercyclical capital buffers or margin requirements).

INVESTING IN RESILIENCE

28. Important progress. Following the passage of the Dodd-Frank Act, a panoply of measures 

were put in place to lessen the potential for financial sector vulnerabilities. These include enhanced 

capital and liquidity buffers, strengthened underwriting standards in the housing sector, and greater 

transparency to mitigate counterparty risks (see the 2015 Financial System Stability Assessment). 

There is growing evidence these efforts have had tangible, positive macroeconomic effects in 

lessening financing constraints and boosting investment (see Box 7). 

29. Strengthening regulatory coordination and preparedness. Nevertheless, the agenda 

remains unfinished. To keep pace with a continuously changing financial risks profile, continued 

evolution of the oversight framework is needed, with the deployment of additional regulatory and 

supervisory tools that include, but are not necessarily limited to, macroprudential policies. It will be 

important to do this in a way that ensures that regulatory and supervisory safeguards remain 

adaptable and flexible in tackling new risks as they emerge. There are five prominent, near-term 

priorities:

 The Financial Stability Oversight Council (FSOC). Given the complexity of the U.S. 

regulatory system—including the number of agencies involved—the effectiveness of the 

FSOC in proactively identifying and addressing risks in a timely and assertive manner is 

critical. 

2009 2010 2011 2012 2013 2014

Bank regulatory capital to risk weighted assets 1/ 13.9 14.8 14.7 14.5 14.4 14.4

Bank capital to assets 12.4 12.7 12.2 12.0 11.8 11.7

Bank nonperforming loans to total loans 5.0 4.4 3.8 3.3 2.5 2.0

Bank provisions to nonperforming loans 2/ 57.7 64.5 62.5 58.5 65.6 75.4

Bank return on assets 3/ 0.2 0.9 1.2 1.4 1.6 1.5

Bank return on equity 3/ 1.7 6.9 9.6 11.6 13.2 12.6

Source: Global Financial Stability Report, April 2015

1/ Basel I

2/ Data are from the website of the Federal Deposit Insurance Corporation

3/ Data are annualized using quarterly underlying series reported by the authorities for 

dissemination on the IMF's FSI website (http://fsi.imf.org/)

United States: Financial Soundness Indicators

(percent, unless otherwise indicated)
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INTERNATIONAL MONETARY FUND 25

 To underscore this goal, all the individual FSOC member agencies should have an explicit 

financial stability mandate. Each material threat identified in the FSOC Annual Reports 

should be accompanied by a list of specific follow-up actions with regular reporting of 

progress in tackling those risks. 

 For newly designated entities, oversight by the Federal Reserve should be put in place on 

an expedited timetable and delays in the implementation of enhanced regulatory 

measures to safeguard against risks should be minimized.

 While coordination between agencies has clearly improved, there is a need for greater 

clarity on the roles and responsibilities for system-wide crisis preparedness and 

management, under the FSOC umbrella. 

 Data blind spots. Despite progress made by the work of the Office of Financial Research

(OFR), the Fed, and other FSOC member agencies, the comprehensive information needed to 

fully assess and understand financial stability risks—particularly the channels for 

interconnections between different parts of the system—is not available. Data is 

compartmentalized with some agencies seeing part of the puzzle but none having a full 

picture. Evidently, such data collection and analysis will always be a work-in-progress. 

However, greater efforts are needed to overcome the legal, technological and other 

obstacles to providing the FSOC and the OFR with the data it needs to have a comprehensive 

view and analysis of systemic risks. Continued and more expansive cross-agency 

collaboration on projects to better understand specific vulnerabilities will also prove valuable. 

 Insurance. While capital positions have improved, the search for yield has prompted insurers 

to take on greater risks by investing in private equity, hedge funds, riskier corporate bonds, 

and real-estate-related assets (Box 8). The absence of national standards or consolidated 

supervision makes any assessment of risks in the insurance industry necessarily tentative and 

incomplete. However, there is significant scope to improve the institutional framework. 

Specifically, there is a need for:

 A coordinated, nationally consistent approach to regulation (particularly for valuation and 

solvency requirements), supervision and stress testing. This would bring about a 

convergence in standards and supervisory practices and eliminate regulatory arbitrage 

as, for instance, through captive insurers. 

 Assigning regulatory responsibilities to an independent agency that is adequately 

resourced, with a nation-wide mandate, operational independence, appropriate powers, 

and accountability. In their current configuration, neither the Federal Insurance Office nor 

the National Association of Insurance Commissioners is equipped to take on this role 

(although their expertise would be indispensable for the new nation-wide body). 
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26 INTERNATIONAL MONETARY FUND 

0

3

6

9

0

3

6

9

France Germany Italy Spain UK US

2007 2013

Bank Equity (percent of total bank assets)

Source: IMF staff estimates

Box 7. Effects of Bank Capital on U.S. Corporate Investment 

Context. Since the global financial crisis, bank 

capital has improved substantially. New capital 

requirements, increases in the leverage ratio for 

systemically important banks (to 6 percent), and 

new requirements on capital plans have led to 

balance sheet repair albeit at different speeds 

across countries 

Analysis. A detailed dataset of over 11,000 

nonfinancial firms in 16 advanced economies is 

used to draw out the macrofinancial 

implications of such efforts and whether 

strengthening the capital position of banks has had a measurable impact on the real economy.1

Findings. The main results of the work are:

 Those firms with greater reliance on funding from the financial system (rather than from 

internally generated earnings) invest more in those countries where the average equityto-assets ratio of the banking system is highest. 

 The magnitude of this effect is relatively large. For example, the increase in bank capital in 

the U.S. from 2007 to 2013 would, all else constant, add 0.6 percent of GDP to the overall 

level of U.S. corporate investment. Conversely, if U.S. banks today maintained the average 

level of equity-assets that is currently prevailing in European banks, the U.S. would have 

0.7 percent of GDP less investment (purely from the effect that lower capital has on the 

availability of credit to those firms reliant on financial system funding).

 The investment effect is more pronounced when the sample is restricted to the top onethird of firms in terms of the underlying quality of their fundamentals (as measured by 

their one year ahead probability of default). This indicates that insufficient bank capital is 

a binding constraint on firms with productive investment opportunities.

The empirical findings are robust to the inclusion of other explanatory variables that might affect 

the banks’ willingness to extend credit (such as the system’s average ratio of nonperforming 

loans or the share of intermediation undertaken by banks rather than capital markets), to 

changing the sample of countries, and to restricting the sample to a subset of sectors.

1 See Y. Sun and H. Tong, “How Does Post-Crisis Bank Capital Adequacy Affect Firm Investment?” IMF 

Working Paper, 15/145.
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INTERNATIONAL MONETARY FUND 27

 Asset management. The increasing role of nonbanks has brought important benefits, 

including a greater diversity of funding sources. However, it has also resulted in greater 

uncertainty about financial risks and a shift in the locus of systemic concerns toward the 

nonbanks. The U.S. system of regulatory oversight has not kept pace with these changes. The 

increase in assets held by high-yield debt funds and the liquidity transformation undertaken 

by some asset managers creates a potential channel to amplify shocks through asset 

liquidation and funding channels. 

 Such vulnerabilities call for explicit requirements on risk management and internal 

control in the sector (particularly linked to liquidity and derivative use) as well as more 

frequent and intensive examination of asset managers.

 There should be a structured effort to stress test the asset management industry for a 

range of downside shocks (including illiquidity and counterparty risks). The results should 

be published so as to help build a better data landscape of the industry and to facilitate a 

more complete understanding of embedded risks. Over time, such an effort could be 

combined with a strengthened Dodd-Frank Act stress testing process that explores 

interconnections and bank-nonbank feedback chains. 

 Money markets. Changes to the triparty repo infrastructure (including reengineering of the 

settlement cycle, improvements in the collateral allocation processes, and limits on intra-day 

credit) have reduced risks. Despite reforms, vulnerabilities in the triparty repo market remain 

large (including the reliance on two clearing banks). 

 Potential next steps could include the use of central counterparty clearing houses for 

repo transactions. This, in turn, would require implementing adequate risk management 

requirements for central counterparty clearing houses including cyber resilience, 

standardized stress testing, and recovery and resolution regimes. 

 The requirement that some money market funds move to a floating net asset value by 

2016 is a positive step. However, a significant share of funds will be able to maintain 

stable net asset values, allowing institutional and retail investors to treat their investment 

as deposit-like, despite their greater liquidity risks. Shifting all money market funds to 

floating net asset values should be reconsidered. 
UNITED STATES

28 INTERNATIONAL MONETARY FUND 

0

3

6

9

0

3

6

9

2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3

Min/max exposure

Median exposure

Distribution of Interbank Credit Risk Across Six 

G-SIBs (percent of each institution's capital)

Sources: FRB; and IMF staff estimates

-0.7

-0.1

-0.2

-0.5

-0.8

0.0

0.3

0.2

-0.7

-1.0

A B C D E

Defaulting counterparty

Excluding CDS exposures

With CDS exposures

Capital Losses of a Large G-SIB due to Counterparty 

Defaults 1/ (percent of capital)

Sources: FRB; and IMF staff estimates

1/ Identity of financial entities not disclosed due to confidentiality restrictions

30. Improving the understanding of interlinkages. From an aggregate perspective, estimated 

financial interconnections among the largest U.S. bank holding companies (BHCs) have fallen over 

the last two years (to below 2 percent of capital for most institutions). Interbank credit risk between 

these systemic institutions is low (although one of 

the larger BHCs has a markedly higher degree of 

interconnectedness). Network analysis suggests:

3

 The large BHCs would be robust to a range

of credit and funding shocks to a single 

counterparty (direct exposures to individual 

banks are not large enough to create 

systemic spillovers from the failure of a 

single institution). 

 However, multiple failures could give rise to 

contagion chains and there could be indirect 

linkages from common asset holdings and 

market positioning. 

 Finally, the pattern of contagion would be 

very different if off-balance sheet exposures 

(e.g. credit default swaps) are incorporated. 

The ability of the large BHCs to rapidly change their 

linkages with other systemic institutions, the lack of 

visibility of such connections, the complexity of the 

system, and the important impact of derivatives on 

the incidence of risk all underscore the need for a 

coordinated effort to better trace the interconnections and channels of contagion across the system. 

The regular Fed stress tests could be expanded to incorporate a deeper analysis and assessment of 

propagation effects via inter-institutional links. In doing this, though, the current lack of information 

about the size and nature of interlinkages between banks and nonbanks will be a significant 

constraint.

31. Simplifying the institutional structure. Over time, the regulatory system should be made 

simpler, with fewer agencies, so as to lessen gaps and overlaps and reduce the potential for 

regulatory arbitrage. This would also make the FSOC’s coordination role easier. 

 

3

To assess potential spillovers among the six largest U.S. G-SIBs, FRB staff implemented an updated version of the 

network stress-test methodology developed in Espinosa and Solé (2011) and the results are intended to be illustrative 

and should be treated with some caution. See the 2015 FSAP Stress-Testing Technical Note for further details of how 

the exercise was conducted as well as key assumptions and caveats.
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INTERNATIONAL MONETARY FUND 29

32. Banks. Regulatory changes and the evolving global environment are leading banks to rethink 

their business models. As a result, there is a premium on continued intensive bank supervision to 

avoid banks trying to restore profitability through looser credit standards and riskier investment 

strategies. With banks remaining critical for overall systemic stability, steps should be taken to 

address gaps in the capital regime relative to Basel III, to strengthen supervisory guidance and limit 

concentration risk and transactions with related parties, and to upgrade the regimes for both interest 

rate risk in the banking book and for operational risk. Greater quantitative guidance from the 

regulators would be helpful (e.g. on the capital to be set aside for interest rate risk).

33. Cross-jurisdiction resolution. The five largest banks in the U.S. account for 45 percent of 

banking system assets, twice the share of 10 years ago. As such, effective resolution and recovery 

plans for large banks are important to underpin a stable financial system. Existing plans should 

continue to be thoroughly assessed against severe contingencies that have a salient cross-border 

component. While cooperation agreements with relevant overseas authorities have recently been 

signed to manage the resolution of institutions that have a significant international presence, 

attention will need to be devoted to their implementation. The respective agencies are responsible 

and the FSOC should monitor progress. Moreover, legislative changes would likely be needed to 

avoid undue ring-fencing and the subordination of foreign claimants.

34. Authorities’ views. The Dodd-Frank Act provided much-needed changes that have 

buttressed financial regulation and oversight; implementation of the Act is ongoing. Steps to 

strengthen the financial stability framework will continue but it was seen as equally important to 

resist backtracking and the persistent efforts to dilute the progress already made, particularly as 

memories of the crisis begin to fade. Current risks to financial stability remained moderate, and the 

regulators were ever attentive to the evolving nature of vulnerabilities. The FSOC was viewed as 

performing well as a coordinating committee and had served as a forum for regulatory coordination 

on a range of issues including the Volcker rule, capital standards, and other reforms. Enhanced data 

gathering and sharing was ongoing and important joint initiatives were underway, with different 

regulators partnering up to study emerging issues. Market liquidity issues remained an area of focus 

and various authorities were working to examine the expansion of electronic trading, the role of 

changes in regulatory policies, and the rapid growth of certain markets (e.g. for corporate bonds). 

Stress testing has proven to be a useful tool to assess the resilience of the system and efforts were 

ongoing to improve that process through better scenario design and network analysis. Continued 

monitoring was warranted in the insurance sector, however there was also a need to be cognizant of 

the broader insurance business models being pursued in the U.S. Before moving ahead with further 

regulation of money market funds, it was felt that time was needed also to assess the effects of 

recent improvements in regulation. It was emphasized that frameworks for cross-border monitoring 

of risks and resolution of failing institutions were under active development, in coordination with 

partner regulators in other countries and the Financial Stability Board.
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30 INTERNATIONAL MONETARY FUND 

15

20

25

30

35

40

14

16

18

20

22

24

26

1970 1981 1992 2003 2014

Leverage and Size of the Life Insurance Sector

Financial Assets

(percent of GDP, RHS)

Sources: Haver Analytics; and IMF staff calculations

1/ Financial Assets/(Financial Assets - Liabilities)

Financial Leverage 1/

Box 8. Systemic Vulnerabilities in the Life Insurance Sector

The life insurance sector intermediates assets worth one-third of GDP and is highly leveraged. 

Although the sectors is much better capitalized than in previous decades, its sheer size and leverage 

make it an important contributor to systemic risk.

Vulnerabilities are high at the company level

Investment yields have been declining over recent 

years as higher-coupon bonds matured and were 

replaced by lower-yielding new issues. From 2006 

to 2013, the industry-wide spread between the net 

portfolio yield and the guaranteed credited rate on 

policies dropped by 57 basis points. Insurers 

responded to the decline in margins by extending 

portfolio durations (the median duration reached 

7.7 percent in 2013, compared to 7.2 percent in 

2009) and increasing allocations to lower rated 

assets. While credit and redemption risks in the 

industry are small, prolonged low interest rates 

pose a slow burning solvency risk for life insurers. 

Systemic risks over the medium term

Staff stress tests show substantial long-term stability risks in the U.S. life insurance sector1. The 

prolongation of the low rates environment until 2018 would lead 11 out of 18 life insurance groups to 

report negative shareholder equity (assuming a full mark-to-market accounting regime.) Similarly, a 

sharp spike in interest rates would pose a material risk to the market value of their bond portfolio

(given the longer durations insurers are holding). Rising interest rates could also lead to an increase in 

policy surrenders as policyholders switch into higher-yielding assets (within and outside the insurance 

sector). This would leave the sector vulnerable to liquidity drain and losses on those products that are 

exempt from surrender penalties.

Shortcomings in the supervisory regime

Insurance supervision has been strengthened in recent years but reforms remain a work in progress. 

Notably, insurance has been brought within the scope of system-wide oversight of the financial sector 

by the FSOC, and there have been other supervisory enhancements with the establishment of the 

Federal Insurance Office (FIO) and expanded oversight responsibilities of the Fed. However, the Fed’s 

supervisory expertise of insurance groups still needs to be built and staffing of the relevant regulation 

and supervision units with appropriate skills and expertise requires ongoing effort. At the state level, 

the transition from a rules-based approach to more principles-based regulation and risk-focused 

supervision continues to face implementation challenges.

1

See 2015 FSAP Stress Testing Technical Note.
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INTERNATIONAL MONETARY FUND 31

68

70

72

74

76

78

80

68

70

72

74

76

78

80

2013 2015 2017 2019 2021 2023 2025

Federal Debt Held by the Public (percent of GDP, FY)

Source: IMF staff estimates

Baseline

Adjustment

UNADDRESSED FISCAL CHALLENGES

35. The FY2016 Budget. Both the President and the Congress have put forward budget 

proposals for FY2016:

 The President’s budget is forecast by the Office of Management and Budget to deliver a 

stable federal government deficit of around 21⁄2 percent of GDP through the 10 year budget 

window and stabilize the federal debt at about 73 percent of GDP by 2025. To achieve this, 

the proposal outlines savings in healthcare spending, increased revenues from lower 

personal income tax deductions for higher income individuals, changes to the business tax 

code, an end to sequestration, funds to augment education and infrastructure programs, and 

immigration reform. 

 The congressional budget blueprint aims to balance the budget in 10 years without revenue 

increases and through significant—but largely unspecified—cuts to discretionary, 

nondefense spending.

Lawmakers are now working to pass appropriations bills, consistent with the congressional budget 

blueprint, to fund the government in FY2016. There is a wide gap between the two proposals and the 

President has indicated he would veto spending bills that either lock in sequestration or further 

curtail discretionary, non-defense programs.

36. Staff’s view. The federal debt and deficit 

are expected to decline during the next few years 

but, under the current constellation of policies, this 

downward trajectory will not last. After 2019, the 

federal debt will begin rising again as aging-related 

spending pressures assert themselves and interest 

rates move to more normal levels. Specifically, over 

the next decade health care and social security 

outlays are expected to increase by 13⁄4 percent of 

GDP and interest spending will rise by 2 percent of 

GDP. As a consequence, the federal debt is forecast 

to rise to about 78 percent of GDP by 2025. In staff’s view, aiming for a medium-term general 

government primary surplus of about 3⁄4 percent of GDP (a federal government primary surplus of 

about 1 percent of GDP) would be appropriate to put the public debt ratio firmly on a downward 

path. Addressing these medium-term imbalances will require actions on multiple fronts:

 Tax reform. A reform of the U.S. tax code is long overdue. Complexity and loopholes have 

increased over the years, undermining revenues and damaging productivity. Changes should 

focus on simplifying the system and broadening the tax base by capping or eliminating 

personal income tax deductions; removing tax preferences, exclusions and deductions from 

the business tax; and changing the tax treatment for multinationals to limit base erosion and 

profit shifting. In addition to improving the structure of the system, there is a need to raise 
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32 INTERNATIONAL MONETARY FUND 

revenues, which could be achieved through a broad-based carbon tax (Box 9), a higher 

federal gas tax, and the introduction of a federal-level VAT.

 Pension reform. The prospective depletion of the social security trust fund needs to be 

countered through a gradual increase in the retirement age, greater progressivity of benefits, 

raising the maximum taxable earnings for social security contributions, and indexing benefits 

and contributions provisions to chained CPI.

 Health care. Cost pressures have declined but more efforts are needed. Legislation could 

usefully focus on ensuring a better coordination of services to patients with chronic 

conditions, steps to contain overuse of expensive procedures and technologies, higher 

degree of cost sharing with beneficiaries, and eliminating tax breaks for more generous 

employer-sponsored health plans.

37. Near-term fiscal priorities. Tackling the longer-term fiscal challenges would provide scope 

to modestly expand the near-term budget envelope (by around 1⁄4 percent of GDP, in line with past 

policy advice) to finance supply-side measures that support growth, job creation, and productivity.

This would include front-loading infrastructure spending, raising labor force participation (e.g., 

through policies such as subsidized childcare assistance), incentivizing private innovation, 

strengthening education spending (including through apprenticeships and vocational training), and 

improving job search assistance programs. Creating a stable funding solution for the Highway Trust 

Fund, that will prevent the need for continued stop-gap patches, and reducing policy uncertainty 

associated with the budget process are immediate priorities.

38. Authorities’ view. The President’s FY2016 budget carefully balances the medium-term need 

for consolidation with the near-term priorities to bolster growth and job creation. The proposal 

achieves $1.8 trillion in deficit reduction over the next 10 years and stabilizes the debt-GDP ratio. 

Policies underlying that adjustment include repairing the broken U.S. tax code, ending the broad 

brush austerity implied by sequestration, slowing healthcare cost growth, cutting inefficient 

spending, instituting comprehensive immigration reform, and prioritizing critical investments in 

research, education, and training. Expanding investments in infrastructure—including $478 billion 

over the next six years for surface transportation—is also a long-held goal of the Administration. In 

that, the near-term emphasis should be on a multi-year extension of the Highway Trust Fund which 

would create an environment of predictability that would improve the ability to plan public projects. 

A serious discussion on business tax reform was needed in the U.S. and could garner bipartisan 

support. It was also clear that it was not in anyone’s interest to repeat the high-wire tension 

associated with past shutdowns and debt limit discussions. There was hope that a workable 

compromise could be found, similar to that legislated in the Bipartisan Budget Act of 2013. If not, 

though, the President has been clear that he would not sign appropriation bills that the 

Administration views as inadequate in addressing the pressure that sequestration places on 

nondefense discretionary spending. 
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INTERNATIONAL MONETARY FUND 33

1.5

1.8

2.0

2.3

2.5

2.8

3.0

2000 2002 2004 2006 2008 2010

Sales of Petroleoum Fuels Subject to Carbon Tax 

(m3 per capita)

Source: Elgie and McClay (2013)

Introduction of 

carbon tax in B.C.

Rest of 

Canada

British 

Columbia

Box 9. Meeting Climate Pledges and Fiscal Objectives with a Carbon Tax1

The case for a carbon tax. The U.S. has pledged to reduce greenhouse gases by 26–28 percent below 

2005 levels in 2025. Carbon pricing is the most efficient way to achieve this commitment. The 

introduction of a carbon tax in the U.S. would increase the price of fuels and electricity and help

incentivize mitigation efforts and clean technology investments. The recent decline of energy prices 

creates a window of opportunity to introduce carbon pricing.

A lesson from the North. In 2008, British Columbia phased in a carbon tax (rising to CAN $30 per ton 

in 2012) on fossil fuels in transportation, home heating, and electricity to finance reductions in income 

and corporate taxes. Gasoline, for example, increased by 

about CAN 25 cents per gallon financing a 5 percentage 

points reduction in the first two personal income tax 

brackets and a reduction in the corporate income tax 

rate from 12 to 11 percent. The focus on upstream 

taxation minimized administrative issues and led to a 

substantial decline in fossil fuel consumption relative to 

other provinces. Five years after the introduction, per 

capita growth in British Columbia continued to be 

1⁄2 percent higher than in the rest of Canada. 

The administration of carbon taxes in the U.S. should 

be straightforward. A carbon tax would involve building a carbon charge into existing gasoline and 

diesel excises and extending similar charges to the supply of other petroleum products, natural gas, 

and coal. In the U.S., this could involve administering taxes on about 150 petroleum refineries, 500 

large natural gas operators, and about 1,500 coal mines. 

Calibrating the level. A tax of around US$45 per ton of CO2 would reflect costs of global climate 

change, although a higher tax might be needed to meet the 2025 pledge. Leaving global effects aside, 

a substantial carbon tax would result in domestic environmental benefits from less fossil fuel use (e.g. 

better health outcomes from reduced local air pollution).2Phased in gradually, this tax would raise 

revenue of around US$170 billion (0.9 percent of GDP) once fully implemented.

Potential effects. A US$45 per ton of CO2 charge would increase gasoline prices by about 40 cents a 

gallon, electricity prices by 2.2 cents per kWh, and coal prices by US$90 per short ton. Carbon charges 

are regressive, and the introduction of a carbon tax may need to be accompanied with compensation 

mechanisms for low-income households (e.g. through the EITC or existing system of social benefits) 

which would likely use around 10 percent of revenues. Competitiveness concerns would be best 

addressed through international coordination over carbon pricing and, in this, the U.S. could provide a 

leadership role. 

1 I. Parry, et al., 2015. “Implementing a US Carbon Tax: Challenges and Debates” IMF, Brookings and Resources for the Future.

2 I. Parry et al., 2014. “How Much Carbon Pricing is in Countries’ Own Interests? The Critical Role of Co-Benefits”. IMF Working 

Paper, 14/174.
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34 INTERNATIONAL MONETARY FUND 

POVERTY, PRODUCTIVITY AND GROWTH

39. The U.S. economy faces substantial and fundamental challenges from demographic changes 

and an unfinished policy agenda in areas affecting long-term growth. In tackling these, the advice 

from past Article IV consultations bears repeating:

 Confronting poverty (see link). Combine an expansion of the earned income tax credit (to 

workers without dependents, low-income youth, and older workers not yet eligible for social 

security) with an increase in the federal minimum wage. Make permanent the tax provisions 

that are due to expire in 2017, including the extension of the earned income tax credit to 

larger families, the mitigation of the marriage penalty, and increase in the child tax credit. 

 Raising productivity (see link). Invest in infrastructure, particularly in surface transportation. 

Expand sources for infrastructure financing. Reinstate and make permanent the Research and 

Experimentation tax credit. Support states in improving training programs and build 

partnerships with industry and higher education institutions for vocational training. Raise 

educational outcomes through better spending on early childhood education and support 

for science, technology, engineering and math programs. 

 Increasing labor force participation (see link). Improve family benefits, including childcare 

assistance for working families, and modify the federal disability insurance to provide 

incentives for beneficiaries to work part-time.

 Immigration reform. Institute a comprehensive, skills-based immigration reform. Such a 

program would have a significant positive impact on growth and fiscal finances by increasing 

the labor supply (and thus future economic growth rates), strengthening productivity, and 

reducing the dependency ratio.

 Trade policy (see link). Promote bilateral and plurilateral trade agreements, such as the Trans 

Pacific Partnership, alongside renewed efforts to advance the multilateral trade agenda.

 Housing finance reform. Lessen the government’s footprint and foster a greater role for the 

private sector in housing finance by expanding the use of market transactions to transfer 

first-loss risks to private investors; establishing a single securitization platform; making GSE 

guarantee fees more risk-based; subjecting GSEs to similar regulatory requirements as other 

systemically important financial institutions; and lowering the ceilings for the size of 

mortgages that can be securitized by the GSEs (see Selected Issues Paper).

40. Authorities’ view. Tackling poverty will require action on several fronts starting with an 

increase in the minimum wage, a second earner tax credit, and an expansion of the earned income 

tax credit. Both poverty and productivity can be positively affected by the Administration’s proposed 

investments in education including providing tuition-free community college, an expansion of tax 

incentives for higher education, supporting universal preschool and developing high quality 

preschool programs in targeted communities. Providing incentives for private investment, rebuilding 
UNITED STATES

INTERNATIONAL MONETARY FUND 35

public infrastructure, and building consensus around common-sense immigration reform will provide 

important boosts to longer-term growth. The authorities were working to find ways to move housing 

finance reform ahead without legislation so as to reduce the government’s footprint, minimize the 

risks to taxpayers, and encourage private capital. There was also optimism that progress could be 

made on trade agreements—notably on the Trans Pacific Partnerships—and could be an important 

area for bipartisan support, building on the common ground in the recently passed Senate Trade 

Promotion Authority bill.

STAFF APPRAISAL

41. The near-term outlook. Data in the first few months of 2015 have been a setback, mainly 

due to temporary factors. Absent further negative shocks, the U.S. economy should be able to move 

ahead at an underlying run-rate of above 3 percent in the coming quarters. There remain limited 

signs of wage and price inflation and sizable output and employment gaps still remain. 

42. Monetary policy. The FOMC should remain data dependent and defer its first increase in 

policy rates until there are more tangible signs of wage or price inflation than are currently evident. 

Under the staff’s baseline, the pace of policy rate increases is expected to be gradual. At this stage, 

policy rates should not be used in an effort to either reduce leverage or dampen financial stability 

risks.

43. The current fiscal policy dysfunction. The inability of the Congress and the Executive 

Branch to collectively pass a budget and corresponding appropriations bills creates fiscal uncertainty 

that is damaging to the U.S. economy. The disruption from either a prospective government 

shutdown or a stand-off linked to the federal debt ceiling represent important (and avoidable) 

downside risks to growth and job creation which could move to the forefront, once again, later in 

2015. 

44. A need for agreement on a medium-term fiscal strategy. Public finances in the U.S. 

remain on an unsustainable path. A credible plan is needed to address these imbalances and should 

include revenue enhancing reforms to the tax system, a pension reform that intertemporally aligns 

contributions and benefits, and steps to lessen the growth in public healthcare costs. Such a plan 

would provide near-term fiscal space to finance supply-side measures that support growth, job 

creation and productivity.

45. Strengthening financial stability on a number of fronts. Much has been done over the 

past several years to strengthen the U.S. financial system and it will be important to ensure that this 

progress—including the legislative advances in the Dodd Frank Act—is not rolled back. The FSAP has 

identified an extensive list of reforms to raise the U.S. system’s resilience and these should be 

pursued without delay.

46. The exchange rate. So far, the global adjustment of exchange rates—and the strengthening 

of the U.S. dollar—has represented a warranted shift of demand to those parts of the world economy 

that were being most threatened by deflation and stagnation. Nonetheless, the stronger dollar is 
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36 INTERNATIONAL MONETARY FUND 

impacting U.S. growth and job creation, as well as weighing on inflation. There is a risk that a further 

marked appreciation of the dollar—particularly one that takes place in an environment where 

policies to address growth deficiencies languish both in the U.S. and abroad—would be harmful.

47. Supply side reforms. A range of challenges linked to poverty, productivity and growth 

remain unaddressed and will require policy efforts simultaneously on a number of fronts.

48. It is recommended that the next Article IV consultation take place on the standard 12-month 

cycle.
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INTERNATIONAL MONETARY FUND 37

2014 2015 2016 2017 2018 2019 2020

National production and income

Real GDP 2.4 2.5 3.0 2.7 2.5 2.3 2.0

Net exports 2/ -0.2 -0.7 -0.5 -0.4 -0.4 -0.3 -0.3

Total domestic demand 2.5 3.0 3.5 3.0 2.7 2.5 2.2

Private final consumption 2.5 3.1 3.4 2.8 2.6 2.5 2.1

Public consumption expenditure 0.4 0.8 1.2 1.1 1.0 1.2 1.0

Gross fixed domestic investment 3.9 3.8 5.6 5.2 4.4 3.5 3.4

Private fixed investment 5.3 4.6 6.5 6.1 5.2 3.9 3.8

Equipment and software 6.4 5.5 7.2 7.0 5.7 3.7 4.3

Intellectual property products 3.8 4.1 4.0 3.8 3.7 3.0 2.3

Nonresidential structures 8.2 -1.2 3.7 3.0 3.0 2.2 2.1

Residential structures 1.6 6.5 10.4 9.3 7.4 5.7 5.0

Public fixed investment -2.5 0.1 1.2 0.8 0.4 1.2 1.2

Change in private inventories 2/ 0.1 0.1 0.0 0.0 0.0 0.0 0.0

Nominal GDP 3.9 3.3 4.5 4.6 4.7 4.6 4.2

Personal saving rate (% of disposable income) 4.9 5.3 5.2 5.2 5.2 5.0 4.9

Private investment rate (% of GDP) 16.4 16.8 17.3 17.7 18.1 18.2 18.4

Unemployment and potential output

Unemployment rate 6.2 5.4 5.1 5.0 4.9 4.8 5.0

Potential GDP 1.9 2.0 2.1 2.2 2.2 2.2 2.1

Output gap (% of potential GDP) -2.0 -1.6 -0.7 -0.2 0.0 0.2 0.0

Inflation

CPI inflation (q4/q4) 0.6 0.0 1.7 2.2 2.4 2.4 2.3

Core CPI Inflation (q4/q4) 0.6 0.0 1.7 2.2 2.4 2.4 2.3

PCE Inflation (q4/q4) 0.7 0.7 1.4 1.9 2.2 2.2 2.0

Core PCE Inflation (q4/q4) 1.4 1.3 1.6 2.0 2.2 2.1 2.0

GDP deflator 1.5 0.8 1.4 1.9 2.2 2.3 2.1

Interest rates (percent)

Fed funds rate 0.1 0.1 0.8 1.9 2.9 3.5 3.5

Three-month Treasury bill rate 0.0 0.0 0.7 1.8 2.8 3.4 3.4

Ten-year government bond rate 2.5 2.3 3.0 3.6 4.1 4.6 4.8

Balance of payments

Current account balance (% of GDP) -2.4 -2.7 -2.9 -3.1 -3.2 -3.3 -3.4

Merchandise trade balance (% of GDP) -4.2 -4.1 -4.2 -4.4 -4.5 -4.6 -4.8

Export volume 3/ 4.0 0.3 3.8 3.0 3.5 4.2 4.5

Import volume 3/ 4.1 5.3 5.8 5.5 5.7 5.6 5.7

Net international investment position (% of GDP) -39.7 -41.3 -42.9 -45.8 -49.1 -53.0 -59.0

Saving and investment (% of GDP)

Gross national saving 18.1 17.8 17.6 17.8 18.0 18.0 18.0

General government -1.6 -1.5 -1.3 -1.0 -1.0 -1.3 -1.6

Private 19.8 19.2 19.0 18.8 19.0 19.3 19.6

Personal 3.6 4.0 3.9 3.9 3.9 3.7 3.6

Business 16.1 15.2 15.1 15.0 15.1 15.6 15.9

Gross domestic investment 19.8 20.1 20.5 20.9 21.1 21.2 21.4

Private 16.4 16.8 17.3 17.7 18.1 18.2 18.4

Public 3.4 3.3 3.2 3.2 3.1 3.0 3.0

Sources: Haver Analytics; and IMF staff estimates

1/ Components may not sum to totals due to rounding

2/ Contribution to real GDP growth, percentage points

3/ NIPA basis, goods

Table 1. Selected Economic Indicators 1/

(percentage change from previous period, unless otherwise indicated)

Projections
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38 INTERNATIONAL MONETARY FUND 

2014 2015 2016 2017 2018 2019 2020

Real exports growth

Goods and services 3.2 1.4 2.5 3.0 3.7 4.2 4.2

Goods 4.0 0.3 3.8 3.0 3.5 4.2 4.5

Services 1.4 3.7 -0.2 2.9 4.2 4.0 3.6

Real imports growth

Goods and services 4.0 5.3 5.4 5.2 5.3 5.3 5.3

Goods 4.1 5.3 5.8 5.5 5.7 5.6 5.7

Nonpetroleum goods 5.8 6.9 7.8 6.2 6.2 6.2 6.3

Petroleum goods -4.5 -6.9 -12.0 -1.0 0.2 0.0 0.0

Services 3.6 5.3 3.9 4.0 3.6 3.6 3.2

Net exports (contribution to real GDP growth) -0.2 -0.7 -0.5 -0.4 -0.4 -0.3 -0.3

Nominal exports

Goods and services 13.4 12.9 12.7 12.5 12.5 12.5 12.6

Nominal imports

Goods and services 16.5 15.8 15.8 15.8 15.8 15.8 16.0

Current account

Current account balance -2.4 -2.7 -2.9 -3.1 -3.2 -3.3 -3.4

Balance on trade in goods and services -2.9 -2.8 -2.9 -3.0 -3.1 -3.1 -3.2

Balance on income 0.5 0.1 0.1 0.0 -0.1 -0.1 -0.2

Capital and Financial Account

Balance on financial account -0.8 -2.7 -2.8 -3.1 -3.2 -3.3 -3.4

Foreign direct investment abroad 2.0 2.2 2.3 2.3 2.3 2.3 2.3

Foreign direct investment in the U.S. 0.5 1.1 1.1 1.1 1.1 1.1 1.1

Foreign acquisition of U.S. securities 1.0 0.4 0.5 0.5 0.5 0.5 0.5

Foreign acquisition of other U.S. liabilities 3.0 4.5 5.0 5.2 5.3 5.4 5.5

Net foreign direct investment 1.5 1.2 1.2 1.2 1.2 1.2 1.3

Net portfolio investment -0.8 -1.9 -2.5 -2.6 -2.8 -2.8 -3.0

Portfolio investment assets 3.1 3.0 3.0 3.0 3.0 3.0 3.0

Memorandum items

Current account balance (US$ billions) -411 -480 -538 -606 -656 -704 -756

Non-oil trade balance (% of GDP) -1.9 -2.4 -2.7 -2.8 -2.9 -2.9 -2.9

Broad real dollar index (1973M3=100) 86.3 93.7 93.8 93.8 93.8 93.8 93.8

Foreign real GDP growth (% chg, ar) 2.6 2.6 2.9 2.9 3.0 3.1 3.1

U.S. real GDP growth (% chg, saar) 2.4 2.5 3.0 2.7 2.5 2.3 2.0

U.S. real total domestic demand growth (saar) 2.5 3.0 3.5 3.0 2.7 2.5 2.2

Sources: Haver Analytics; and IMF staff estimates

(% of GDP)

Table 2. Balance of Payments

(annual percent change unless otherwise indicated)

Projections
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INTERNATIONAL MONETARY FUND 39

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Federal government

Revenue 17.5 17.9 18.0 18.0 17.9 17.7 17.7 17.7 17.8 17.8 17.9 18.0

Expenditure 20.7 20.7 21.0 20.6 20.3 20.6 20.9 21.2 21.7 21.8 21.7 22.1

Non-interest 19.4 19.4 19.6 19.1 18.6 18.6 18.7 18.7 19.0 18.9 18.6 19.0

Interest 1.3 1.3 1.4 1.6 1.8 2.0 2.2 2.5 2.7 2.9 3.0 3.1

Budget balance 1/ -3.2 -2.8 -3.0 -2.6 -2.5 -2.9 -3.2 -3.4 -3.9 -3.9 -3.8 -4.1

Primary balance 2/ -1.9 -1.5 -1.6 -1.1 -0.7 -0.9 -1.0 -1.0 -1.3 -1.0 -0.7 -1.0

Primary structural balance 3/ 4/ -1.4 -1.1 -1.4 -1.0 -0.7 -0.9 -1.0 -0.9 -1.2 -1.1 -0.8 -1.1

 Change 1.0 0.3 -0.3 0.4 0.3 -0.2 0.0 0.0 -0.3 0.1 0.3 -0.3

Federal debt held by the public 74.0 74.9 75.3 75.0 74.5 74.4 74.8 75.4 76.5 77.5 78.3 79.4

General government

Revenue 31.1 31.4 31.3 31.2 30.9 30.7 30.7 30.8 30.8 30.9 31.0

Expenditure 36.0 35.8 35.5 34.9 34.6 34.7 34.9 35.2 35.5 35.5 35.4

 Net interest 2.1 2.1 2.1 2.1 2.3 2.5 2.6 2.8 3.0 3.2 3.3

Net lending 1/ -4.9 -4.4 -4.2 -3.8 -3.7 -4.0 -4.2 -4.4 -4.7 -4.6 -4.3

Primary balance 2/ -2.8 -2.4 -2.1 -1.6 -1.4 -1.5 -1.6 -1.6 -1.7 -1.4 -1.1

Primary structural balance 3/ 4/ -2.3 -1.8 -1.8 -1.5 -1.4 -1.6 -1.6 -1.6 -1.6 -1.4 -1.1

 Change 0.9 0.5 0.1 0.3 0.1 -0.2 0.0 0.0 -0.1 0.2 0.3

Gross debt 106.4 107.3 107.9 107.9 107.6 107.6 108.2 108.9 109.8 110.7 111.5

incl. unfunded pension liabilities 122.6 124.9 125.3 125.2 124.7 124.6 125.0 125.6 126.3 127.1 127.8

Memorandum items

Federal government deficit

President's FY2016 Budget -2.8 -3.2 -2.5 -2.3 -2.3 -2.4 -2.5 -2.6 -2.6 -2.5 -2.4 -2.5

CBO's Assessment of the Budget -2.8 -2.7 -2.0 -2.0 -2.1 -2.4 -2.6 -2.9 -2.9 -2.9 -2.9 -2.9

CBO Baseline Scenario (current law) -2.8 -2.7 -2.4 -2.3 -2.4 -2.8 -3.1 -3.3 -3.7 -3.6 -3.4 -3.8

Federal government debt

President's FY2016 Budget 74.1 75.1 75.0 74.6 74.3 74.1 74.0 74.0 73.9 73.7 73.5 73.3

CBO's Assessment of the Budget 74.1 74.2 73.5 72.7 72.2 72.1 72.1 72.3 72.5 72.7 72.9 73.1

CBO Baseline Scenario (current law) 74.1 74.2 73.8 73.2 72.9 73.1 73.5 74.0 74.9 75.7 76.2 77.1

Sources: Congressional Budget Office; Office of Management and Budget; and IMF staff estimates

1/ Includes staff's adjustments for one-off items, including costs of financial sector support

2/ Excludes net interest

3/ Excludes net interest, effects of economic cycle, and costs of financial sector support

4/ Percent of potential GDP

Note: Staff baseline counts in savings from the reduction in overseas contingency operations and assumes that 

current tax policies are mostly extended (with the notable exception of bonus depreciation) and automatic 

spending cuts are replaced with back-loaded measures (at the same proportion in FY2016 and latter years as the 

replacement achieved for FY2014 and FY2015 by the Bipartisan Budget Act of 2013). Budgetary effects of Medicare 

Access and CHIP Reauthorization Act of 2015 (so-called "DocFix") have been incorporated. The President's Budget 

assumes that the policy measures proposed by the Administration will be implemented. CBO baseline is based on 

current law (and assumes for example that automatic spending cuts take place). The President's Budget uses the 

OMB macroeconomic assumptions. CBO uses CBO macroeconomic assumptions both for its own baseline and its 

assessment of the President's Budget

Projections

Table 3. Federal and General Government Finances

(percent of GDP)

(calendar years; GFSM2001 basis)

(fiscal years; budget basis)

(from authorities)
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40 INTERNATIONAL MONETARY FUND 

Annex I. Risk Assessment Matrix1

 

1

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely 

to materialize in the view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessment of the

risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability 

between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the 

source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive 

risks may interact and materialize jointly.

Nature/Source of 

Risk

Overall Level of Concern

Likelihood of Realization Expected Impact if Risk Materializes

Persistent dollar 

strength

High Medium

Improving U.S. economic prospects versus the rest of 

the world leads to a dollar surge, suppressing exports 

and investment in tradables and eroding growth.

A 10% dollar appreciation could reduce GDP 

by over 1 percentage point over the space of 

two years.

Low oil prices

Medium Medium

Low oil prices triggered by supply factors reverse only 

gradually, amidst weak demand. Larger than expected 

boost to consumption or non-oil investment, 

compensated by a negative impact on investment in 

the energy sector.

A US$10 further decrease in oil prices could 

increase growth by 0.1-0.2 percentage points 

in the first and second year.

Faster increases in 

interest rates

Medium Medium

Fed may raise policy rates at a faster-than-expected 

pace because inflation picks up earlier. Recent 

compression in volatility and risk premia could 

unwind. 

A permanent 50 bps increase in 10-year 

interest rates could subtract about 1⁄2 percent 

of GDP after two years. Sustained spikes in 

term and risk premia would imply greater 

output losses.

Imbalances from a 

protracted period 

of low interest rates

Medium High

Continued search for yield could lead to excess 

leverage, weaker underwriting standards and 

potential mispricing of risk.

If unaddressed, imbalances could lead to 

financial instability with significant economic 

costs and spillovers to the rest of the world.

A protracted period 

of slower growth in 

AEs and EMs

High Medium

Weak demand and persistently low inflation leading 

to “new mediocre” rate of growth. Maturing of the 

cycle, misallocation of investment, and incomplete 

reforms leads to prolonged slower growth in EMs.

Slower growth in advanced and emerging 

economies would weigh on growth.

Political 

fragmentation 

erodes the 

globalization 

process

Medium Low

Russia/Ukraine: the mounting conflict depresses 

business confidence and heightens risk aversion, amid 

disturbances in global financial, trade and commodity 

markets. Heightened risk of fragmentation/state 

failure/security dislocation in the Middle East and 

some countries in Africa, leading to a sharp rise in oil 

prices, with negative global spillovers.

A rise in oil prices would have a negative 

impact on the U.S. with a flight to safety 

resulting in dollar appreciation.

Failure to the raise 

debt limit and U.S. 

bond market stress

Low High

The federal borrowing limit is not raised owing to 

political gridlock. Policymakers do not take sufficient 

measures to put debt on a sustainable trajectory. The 

lack of fiscal sustainability triggers a sharp rise in the 

sovereign risk premium.

Failure to raise the debt limit would be very 

costly and depend on how long the impasse 

lasts. There would be severe global spillovers. 
UNITED STATES

INTERNATIONAL MONETARY FUND 41

Annex II. Public Debt Sustainability Analysis (DSA)

The budget deficit in the United States has been reduced significantly over the past few years. Yet, the 

public debt ratio remains on an unsustainable trajectory over the medium term. Under the baseline 

scenario, public debt is projected to first stabilize, but then to start rising as aging-related spending 

pressures on entitlement programs assert themselves and interest rates normalize. Gross financing 

needs are large but manageable given the global reserve currency status of the United States. A 

medium-term, credible consolidation plan remains a key policy priority.

Background. Significant fiscal consolidation measures were legislated in 2011–13 to tackle the high 

public debt ratio, which has doubled at the federal government level since 2007 as a result of the 

financial crisis and the ensuing recession. The Bipartisan Budget Act of December 2013 partially 

reversed the cuts scheduled to take place in FY2014 and FY2015, replacing them with savings 

generated through cuts to mandatory spending in later years and, thus, improving the pace and 

distribution of near-term deficit reduction. 

Baseline. Staff baseline includes savings from the reduction in overseas contingency operations, and 

assumes that current tax policies are mostly extended (with the notable exception of bonus 

depreciation) and automatic spending cuts are partially reversed and replaced with back-loaded 

measures (similar to the deal reached in the Bipartisan Budget Act). With these assumptions, the 

public debt ratio temporarily stabilizes in 2015–19. However, the debt ratio starts rising again owing 

to the health care and social security related spending pressures from an aging population. Federal 

debt held by the public is projected to increase from 74 percent of GDP now to close to 80 percent 

of GDP in FY2025, with general government gross debt exceeding 110 percent of GDP by CY2024. 

Overall, despite the substantial deficit reduction achieved so far and the legislated savings in the 

pipeline, U.S. public finances remain on an unsustainable trajectory. 

Adjustment scenario. The 2014 general government primary balance was -2.8 percent of GDP. In 

staff’s view, aiming for a medium-term general government primary surplus of about 3⁄4 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. Lower interest expenses than previously projected 

reduce the estimated adjustments needs. Nevertheless, 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 costs. The fiscal projections benefit from the current favorable interest rate-growth 

differential. Reflecting accommodative monetary policy and the safe haven status of the United 

States, real interest rates have fallen well below GDP growth. Under the staff’s baseline, the effective 

interest rate is projected to rise gradually from the current historical lows and reach about 

43⁄4 percent by 2024 (compared to an average of about 4 percent in the previous 10 year period). As 

a result, real interest rates will become a major debt-creating flow over the medium-term. 

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.
UNITED STATES

42 INTERNATIONAL MONETARY FUND 

Stress tests. The public debt dynamics are highly sensitive to growth and interest rate assumptions, 

primarily reflecting the fact that the U.S. public debt ratio already exceeds 100 percent of GDP. 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 113 percent in 2024. 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. 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.

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. 
UNITED STATES

INTERNATIONAL MONETARY FUND 43

United States

Source: IMF staff

Exchange 

Rate Shock

Contingent 

Liability Shock

Change in the 

Share of 

Short-Term 

Debt

Foreign 

Currency 

Debt

Public Debt 

Held by NonResidents

 Heat Map Baseline (2013-2024)

United States Public DSA Risk Assessment

Real Interest 

Rate Shock

External 

Financing 

Requirements

Real GDP 

Growth Shock Gross financing needs 2/

Debt level 1/ Real GDP 

Growth Shock

Primary 

Balance Shock

Primary 

Balance Shock

Exchange 

Rate Shock

Contingent 

Liability shock

Real Interest 

Rate Shock

5/ Includes liabilities to the Eurosystem related to TARGET

4/ An average over the last 3 months, 12-Mar-15 through 10-Jun-15

2/ The cell is highlighted in green if gross financing needs benchmark of 20% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock 

but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant

400 and 600 basis points for bond spreads; 17 and 25 percent of GDP for external financing requirement; 1 and 1.5 percent for change in the share of short-term debt; 

30 and 45 percent for the public debt held by non-residents

Market 

Perception

3/ The cell is highlighted in green if country value is less than the lower risk-assessment benchmark, red if country value exceeds the upper risk-assessment benchmark, 

yellow if country value is between the lower and upper risk-assessment benchmarks. If data are unavailable or indicator is not relevant, cell is white. 

Lower and upper risk-assessment benchmarks are:

1/ The cell is highlighted in green if debt burden benchmark of 85% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not 

baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant

Upper early warning

Evolution of Predictive Densities of Gross Nominal Public Debt

(Percent of GDP)

Debt profile 3/

Lower early warning

(Indicators vis-à-vis risk assessment benchmarks)

 Debt Profile Vulnerabilities

1

1.5

1 2

-1.1%

1 2

Not applicable 

for United States

400

600

1 2

168 bp

1 7

2 5

1 2

3 2%

Bond Spread over 

German Bonds

External Financing 

Requirement 5/

Annual Change in 

Short-Term Public 

Debt

Public Debt in 

Foreign Currency

(Basis points) 4/ (Percent of GDP) (Percent of total) (Percent of total)

0

4 0

8 0

120

160

2014 2016 2018 2020 2022 2024

Baseline Percentiles: 1 0th-2 5th 2 5th-7 5th 7 5th-9 0th

Symmetric Distribution

0

4 0

8 0

120

160

2014 2016 2018 2020 2022 2024

Restricted (Asymmetric) Distribution

no restriction on the growth rate shock

no restriction on the interest rate shock

3 is the max positive pb shock (percent GDP)

no restriction on the exchange rate shock

Restrictions on upside shocks:

3 0

4 5

1 2

30%

Public Debt Held 

by Non-Residents

(Percent of total)
UNITED STATES

44 INTERNATIONAL MONETARY FUND 
UNITED STATES

INTERNATIONAL MONETARY FUND 45

As of June 10, 2015

2004–2012 2/ 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Sovereign Spreads

Nominal gross public debt 79.2 104.2 106.4 107.3 107.9 107.9 107.6 107.6 108.2 108.9 109.8 110.7 111.5 Spread (bp) 3/ 150

Public gross financing needs 17.6 23.2 21.3 22.9 23.2 20.8 19.4 20.9 20.7 21.9 22.0 22.8 22.6 CDS (bp) 2

Real GDP growth (percent) 1.7 2.2 2.4 2.5 3.0 2.7 2.5 2.3 2.0 2.0 2.0 2.0 2.0 Ratings Foreign Local

Inflation (GDP deflator, percent) 2.2 1.5 1.5 0.8 1.4 1.9 2.2 2.3 2.1 2.1 2.1 2.1 2.1 Moody's Aaa Aaa

Nominal GDP growth (percent) 3.9 3.7 3.9 3.3 4.5 4.6 4.7 4.6 4.2 4.2 4.2 4.2 4.2 S&Ps AA+ AA+

Effective interest rate (percent) 4/ 4.0 2.7 2.6 2.5 2.0 2.4 2.7 3.2 3.7 4.0 4.3 4.6 4.8 Fitch AAA AAA

2004–2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Cumulative

Change in gross public sector debt 4.9 1.7 2.3 0.9 0.5 0.0 -0.3 0.1 0.5 0.7 0.9 0.9 0.8 5.1

Identified debt-creating flows 5.1 2.6 1.6 1.6 -0.5 -0.7 -0.7 0.0 1.0 1.4 1.8 1.8 1.7 7.7

Primary deficit 5.0 3.6 2.8 2.4 2.1 1.6 1.4 1.5 1.6 1.6 1.7 1.4 1.1 16.2

Primary (noninterest) revenue and grants 29.2 30.3 30.5 30.8 30.7 30.5 30.2 29.9 29.8 29.8 29.8 29.9 29.9 301.3

Primary (noninterest) expenditure 34.2 34.0 33.4 33.2 32.8 32.1 31.5 31.4 31.4 31.4 31.5 31.3 31.0 317.6

Automatic debt dynamics 5/ 0.1 -1.0 -1.2 -0.7 -2.5 -2.3 -2.0 -1.5 -0.5 -0.2 0.2 0.4 0.6 -8.6

Interest rate/growth differential 6/ 0.1 -1.0 -1.2 -0.7 -2.5 -2.3 -2.0 -1.5 -0.5 -0.2 0.2 0.4 0.6 -8.6

Of which: real interest rate 1.3 1.2 1.1 1.8 0.6 0.4 0.5 0.9 1.5 1.9 2.2 2.5 2.8 15.2

Of which: real GDP growth -1.2 -2.2 -2.4 -2.5 -3.1 -2.7 -2.5 -2.4 -2.1 -2.1 -2.1 -2.1 -2.1 -23.8

Exchange rate depreciation 7/ 0.0 0.0 0.0 ... ... ... ... ... ... ... ... ... ... ...

Other identified debt-creating flows 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net privatization proceeds 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Contingent liabilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other liabilities (bank recap. and PSI sweetner) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Residual, including asset changes 8/ -0.3 -0.9 0.7 -0.7 1.0 0.7 0.3 0.0 -0.5 -0.7 -0.9 -0.9 -0.9 -2.5

Source: IMF staff

1/ Public sector is defined as general government

2/ Based on available data

3/ Bond Spread over German Bonds

4/ Defined as interest payments divided by debt stock at the end of previous year

6/ The real interest rate contribution is derived from the denominator in footnote 4 as r - π (1+g) and the real growth contribution as -g

7/ The exchange rate contribution is derived from the numerator in footnote 2/ as ae(1+r).

8/ For projections, this line includes exchange rate changes during the projection period. Also includes ESM capital contribution, arrears clearance, SMP and ANFA income, and the effect of deferred interest

9/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year

5/ Derived as [(r - p(1+g) - g + ae(1+r)]/(1+g+p+gp)) times previous period debt ratio, with r = interest rate; p = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal 

exchange rate depreciation 

Debt, Economic and Market Indicators 1/

Debt-stabilizing 

primary balance 9/

0.6

United States Public DSA - Baseline Scenario

(percent of GDP, unless otherwise indicated)

Actual

Contribution to Changes in Public Debt

Actual Projections

Projections

-6

-1

4

9

-10

-5

0

5

10

15

20

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Primary deficit Real GDP growth

Real interest rate Exchange rate depreciation

Other debt-creating flows Residual

Proj.

Debt-Creating Flows

(percent of GDP)

-40

-30

-20

-10

0

10

20

30

40

cumulative
UNITED STATES

46 INTERNATIONAL MONETARY FUND 

Baseline Historical Constant Primary Balance

Baseline scenario 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Historical scenario 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Real GDP growth 2.5 3.0 2.7 2.5 2.3 2.0 2.0 2.0 2.0 2.0 Real GDP growth 2.5 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6

Inflation 0.8 1.4 1.9 2.2 2.3 2.1 2.1 2.1 2.1 2.1 Inflation 0.8 1.4 1.9 2.2 2.3 2.1 2.1 2.1 2.1 2.1

Primary balance -2.4 -2.1 -1.6 -1.4 -1.5 -1.6 -1.6 -1.7 -1.4 -1.1 Primary balance -2.4 -4.9 -4.9 -4.9 -4.9 -4.9 -4.9 -4.9 -4.9 -4.9

Effective interest rate 2.5 2.0 2.4 2.7 3.2 3.7 4.0 4.3 4.6 4.8 Effective interest rate 2.5 2.0 2.6 3.1 3.6 4.2 4.6 5.0 5.2 5.4

Constant primary balance scenario

Real GDP growth 2.5 3.0 2.7 2.5 2.3 2.0 2.0 2.0 2.0 2.0

Inflation 0.8 1.4 1.9 2.2 2.3 2.1 2.1 2.1 2.1 2.1

Primary balance -2.4 -2.4 -2.4 -2.4 -2.4 -2.4 -2.4 -2.4 -2.4 -2.4

Effective interest rate 2.5 2.0 2.4 2.8 3.2 3.7 4.0 4.3 4.6 4.8

Source: IMF staff

United States Public DSA - Composition of Public Debt and Alternative Scenarios

(Percent)

Composition of Public Debt

Alternative Scenarios

Underlying Assumptions

0

20

40

60

80

100

120

140

2006 2008 2010 2012 2014 2016 2018 2020 2022 2024

By Maturity 

(Percent of GDP)

Medium and long-term

Short-term

projection

0

25

50

75

100

125

150

175

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Gross Nominal Public Debt

(Percent of GDP)

0

20

40

60

80

100

120

2006 2008 2010 2012 2014 2016 2018 2020 2022 2024

By Currency

(Percent of GDP)

Local currency-denominated

Foreign currency-denominated

projection

0

5

10

15

20

25

30

35

40

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Public Gross Financing Needs

(Percent of GDP)
UNITED STATES

INTERNATIONAL MONETARY FUND 47

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Primary Balance Shock Real GDP Growth Shock

Real GDP growth 2.5 3.0 2.7 2.5 2.3 2.0 2.0 2.0 2.0 2.1 Real GDP growth 2.5 1.2 0.9 2.5 2.3 2.0 2.0 2.0 2.0 2.0

Inflation 0.8 1.4 1.9 2.2 2.3 2.1 2.1 2.1 2.1 2.1 Inflation 0.8 1.0 1.4 2.2 2.3 2.1 2.1 2.1 2.1 2.1

Primary balance -2.4 -4.0 -3.5 -1.4 -1.5 -1.6 -1.6 -1.7 -1.4 -1.1 Primary balance -2.4 -3.6 -2.6 -2.8 -1.5 -1.6 -1.6 -1.7 -1.4 -1.1

Effective interest rate 2.5 2.0 2.4 2.9 3.3 3.8 4.1 4.4 4.6 4.8 Effective interest rate 2.5 2.0 2.4 2.8 3.2 3.7 4.1 4.4 4.6 4.8

Real Interest Rate Shock Real Exchange Rate Shock

Real GDP growth 2.5 1.8 1.7 1.9 1.9 1.8 1.8 1.8 1.8 1.8 Real GDP growth 2.5 3.0 2.7 2.5 2.3 2.0 2.0 2.0 2.0 2.0

Inflation 0.8 1.4 1.9 2.2 2.3 2.1 2.1 2.1 2.1 2.1 Inflation 0.8 1.5 1.9 2.2 2.3 2.1 2.1 2.1 2.1 2.1

Primary balance -2.4 -2.1 -1.6 -1.4 -1.5 -1.6 -1.6 -1.7 -1.4 -1.1 Primary balance -2.4 -2.1 -1.6 -1.4 -1.5 -1.6 -1.6 -1.7 -1.4 -1.1

Effective interest rate 2.5 2.0 2.8 3.5 4.2 4.9 5.4 5.9 6.2 6.4 Effective interest rate 2.5 2.0 2.4 2.8 3.2 3.7 4.0 4.3 4.5 4.7

Combined Shock Contingent Liability Shock

Real GDP growth 2.5 1.2 0.9 1.9 1.9 1.8 1.8 1.8 1.8 1.8 Real GDP growth 2.5 1.2 0.9 2.5 2.3 2.0 2.0 2.0 2.0 2.0

Inflation 0.8 1.0 1.4 2.2 2.3 2.1 2.1 2.1 2.1 2.1 Inflation 0.8 1.0 1.4 2.2 2.3 2.1 2.1 2.1 2.1 2.1

Primary balance -2.4 -4.2 -3.5 -2.8 -1.5 -1.6 -1.6 -1.7 -1.4 -1.1 Primary balance -2.4 -8.4 -1.6 -1.4 -1.5 -1.6 -1.6 -1.7 -1.4 -1.1

Effective interest rate 2.5 2.0 2.9 3.6 4.2 4.9 5.5 5.9 6.2 6.5 Effective interest rate 2.5 2.1 2.6 2.9 3.3 3.8 4.1 4.4 4.6 4.8

Source: IMF staff

United States Public DSA - Stress Tests

Underlying Assumptions

(Percent)

Additional Stress Tests

Macro-Fiscal Stress Tests

Combined Macro-Fiscal Shock

Baseline

Real GDP Growth Shock

Baseline

Primary Balance Shock Real Interest Rate Shock

Contingent Liability Shock

Real Exchange Rate Shock

90

95

100

105

110

115

120

125

130

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Gross Nominal Public Debt

(Percent of GDP)

250

270

290

310

330

350

370

390

410

430

450

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Gross Nominal Public Debt

(Percent of Revenue)

10

14

18

22

26

30

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Public Gross Financing Needs

(Percent of GDP)

90

95

100

105

110

115

120

125

130

135

140

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Gross Nominal Public Debt

(Percent of GDP)

250

300

350

400

450

500

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Gross Nominal Public Debt

(Percent of Revenue)

10

15

20

25

30

35

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Public Gross Financing Needs

(Percent of GDP)
Annex III. External Sector Assessment

Foreign asset 

and liability 

position and 

trajectory

Background. The net international investment position (NIIP) declined from -18.7 per cent of GDP in 2010 to -34.5 

percent of GDP in 2014, 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. /1 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. 

Assessment. A decline in foreign demand for U.S. debt securities (for example, by a protracted failure to restore long-run 

fiscal sustainability) would raise financial stability risks, but at the same time weaken the exchange rate and strengthen 

the trade balance. Given the dollar’s reserve currency status, such financial stability concerns are limited. 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.

Overall Assessment: 

The U.S. external position was broadly 

consistent with medium-term fundamentals 

and desirable policies in 2014. As of May 

2015, sizable recent REER appreciation has 

weakened the U.S. external position. This is 

partially offset by lower oil prices. The U.S. 

REER is currently moderately above the 

level consistent with medium-term 

fundamentals.

The U.S. external position has improved 

considerably in recent years, as have 

assessed imbalances and fiscal policy gaps. 

As of May, the REER was about 9 percent 

above its average value of 2014. This was 

due to solid U.S. economic performance 

and divergence of U.S. growth and 

monetary policy prospects from key 

trading partners. The negative effects of 

the REER on the external position in 2015 

are partially offset by the positive effects 

of lower oil prices.

Recommended policies:

Over the medium term, fiscal consolidation 

should aim for a general government 

primary surplus of about 3⁄4 percent of 

GDP (a federal government primary 

surplus of about 1 percent of GDP). 

Structural policies should be implemented 

to raise productivity and labor force 

growth, including taking steps to fully 

exploit the benefits of the boom in 

unconventional energy production. This 

would be consistent with maintaining 

external stability and achieving full 

employment.

Current 

account 

Background. The U.S. current account (CA) deficit has narrowed from its pre-crisis height of 6 percent of GDP to 2.4 

percent of GDP in 2014, 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). /2 The CA deficit is expected to decline moderately but steadily from 2015 through the medium-term as the 

effects of a stronger U.S. economy and 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 -1.2 percent of GDP for 2014. The calculation, 

however, does not fully account for the increase of unconventional energy production and the effects of the 2014 price 

decline on domestic energy production and the oil balance. The staff view is, on balance, that the 2014 cyclically-adjusted 

CA is between 0 and 1 1⁄4 percent weaker than the level implied by medium-term fundamentals and desirable policies. /3

Real exchange 

rate 

Background. The real effective exchange rate (REER) appreciated in 2014 by about 2 percent compared to 2013. 

Notwithstanding this moderate overall annual figure, the REER appreciated by more than 6 percent in the second half of 

2014, due to solid U.S. economic performance and divergence of U.S. growth and monetary policy prospects from key 

trading partners. As of May 2015, the REER was about 9 percent stronger than its average value over 2014. 

Assessment. Indirect estimates of the REER (relying on the preferred current account assessment) suggest the exchange 

was overvalued by about 5 percent in 2014. Direct REER analyses suggest an overvaluation of between 2 and 8 percent. /4 

Considering all estimates and the uncertainties around them, staff assess the 2014 average REER as overvalued, within a 

range of 0 to 10 percent, compared to the level implied by medium-term fundamentals and desirable policies.

Capital and 

financial 

accounts: 

flows and 

policy 

measures

Background. Net financial outflows were about 0.8 percent of GDP in 2014. 5/ Portfolio inflows increased by about 40 

percent, year over year, in 2014 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 the previous year. The stronger 

outlook for the U.S. economy compared to its key trading partners, the dollar 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. 

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.

48UNITED STATES

INTERNATIONAL MONETARY FUND
United States (continued)

Technical 

Background 

Notes

1/ 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. Gross assets and liabilities are about 140 and 180 per cent of GDP, respectively.

2/ The oil portion of the CA had a deficit of 1.1 percent of GDP in 2014, 0.3 percentage points lower than in 2013, reflecting less net imports and lower oil prices.

3/ Developments in the oil sector are not fully captured in the EBA. In particular, the price elasticity of U.S. oil production has dramatically increased following the shale 

revolution. While acknowledging that the use of price elasticity of oil is implicit in the EBA, it is important to note that the terms of trade adjustment used in the EBA CA 

assessment is derived from longer historical relationships, which fail to fully capture the changing level and nature of U.S. oil production.

4/ The two direct EBA models are the REER Index model and the REER Level model.

5/ This is substantially below pre-crisis levels of about 5.0 percent of GDP.

INTERNATIONAL MONETARY FUND 49

UNITED STATES
UNITED STATES

50 INTERNATIONAL MONETARY FUND

Annex IV. Responses to Past Policy Advice

Fiscal policy. Over the last few years staff has emphasized the importance of fixing long standing 

fiscal problems to slow entitlement spending and normalize the budget process. Cost saving 

measures that were part of the Affordable Care Act appear to be lowering health care inflation. A 

continuing resolution for the rest of FY2015 that was passed in December 2014, subsequent 

extension of funding for the Department of Homeland Security, as well as bipartisan support for 

passing a reform package that ends automatic Medicare payment cuts to doctors –the so-called 

“Doc-Fix” were positive steps that lessened fiscal uncertainties. Staff also advocated adopting a 

medium-term fiscal consolidation plan to restore long-run fiscal sustainability, stressing that early 

action is needed to slow entitlement spending. Anchored by such a plan, staff called for expanding 

the near-term budget envelope through specific measures—including front-loaded infrastructure 

spending, a better tax system, active labor market policies, and improving educational spending, with 

these measures funded by offsetting savings in future years. The prospects for progress in these 

areas remain unfavorable, given the lack of political consensus. 

Monetary policy. Given continued economic slack and expectation of muted inflationary pressures, 

staff supported maintaining policy rates at zero for longer (past mid-2015) than foreseen by markets 

at the time of the last consultation. Staff also stressed the importance of a well communicated 

normalization of U.S monetary policy conditions, in the context of robust U.S growth, and pointed to 

scope for enhancements to the Fed’s communications toolkit. The Fed continues to maintain a 

supportive monetary policy and has made significant efforts—in FOMC statements, press 

conferences, and speeches—to strengthen its communication and prepare markets for 

normalization. 

Financial policies. Based on the 2010 FSAP and subsequent work, staff has recommended several 

steps to tackle financial sector risks, particularly those related to activities in nonbank intermediaries. 

Substantial progress has been made on the national and global financial reform agenda over the last 

few years, and many of the policy suggestions have been implemented. These include enhanced 

capital and liquidity buffers, strengthened underwriting standards in the housing sector, greater 

transparency to mitigate counterparty risks, as well as progress in collecting more comprehensive 

information to assess risks. Still, several reforms emphasized by staff, such as addressing remaining 

vulnerabilities of the money market funds and the tri-party repo market, allowing for the orderly 

resolution of too-important to-fail financial institutions, and reforms to increase the resilience of the 

insurance sector remain to be completed.

Structural policies. Staff has recommended several structural measures to counter the slowdown in 

potential growth and high poverty rates, including expand the EITC, increasing the minimum wage, 

investing in infrastructure and education, improving the tax system, using active labor market 

policies, implementing a broad, skills-based approach to immigration reform and capitalizing on the 

gains from rising U.S. energy independence. The Administration has taken measures to increase 

wages for some workers and several states and localities have increased minimum wages. Building 

political consensus on a reform of the tax system in the direction envisaged by staff (a less complex 
UNITED STATES

INTERNATIONAL MONETARY FUND 51

system with a broader tax base and lower rates) has made little progress. Support for immigration 

reform is elusive and there is no plan to raise the gas tax or to introduce a VAT or a carbon tax.

Housing finance. Staff has stressed policy measures to encourage greater availability of mortgage 

credit, while clarifying the future role of government in housing finance. Administrative measures 

have been taken to lessen regulatory uncertainties and to transfer risks from the agencies to private 

investors through market transactions. Legislative proposals to more fundamentally reshape housing 

finance have made little headway in Congress.
UNITED STATES

STAFF REPORT FOR THE 2015 ARTICLE IV 

CONSULTATION—INFORMATIONAL ANNEX

Prepared By The Western Hemisphere Department

FUND RELATIONS _______________________________________________________________________ 2

STATISTICAL ISSUES ____________________________________________________________________ 4

CONTENTS

June 18, 2015
UNITED STATES

2 INTERNATIONAL MONETARY FUND

FUND RELATIONS

(As of May 31, 2015)

Membership Status: Joined 12/27/45; Article VIII

Percent

General Resources Account: SDR Million Quota

Quota 42,122.40 100.00

Fund holdings of currency 35,112.94 83.36

Reserve Tranche Position 7,014.33 16.65

Lending to the Fund

New Arrangements to Borrow 7,077.08

Percent

SDR Department: SDR Million Allocation

Net cumulative allocation 35,315.68 100.00

Holdings 35,853.92 101.52

Outstanding Purchases and Loans: None

Financial Arrangements: None

Projected Payments to the Fund:

(SDR Million; based on existing use of resources and present holdings of SDRs):

Forthcoming 

2015 2016 2017 2018 2019

Principal

Charges/Interest 0.60 0.60 0.60 0.60

Total 0.60 0.60 0.60 0.60

Exchange Rate Arrangements. The exchange rate of the U.S. dollar floats independently and is 

determined freely in the foreign exchange market. The United States has accepted the obligations 

under Article VIII, Sections 2(a), 3 and 4 of the IMF's Articles of Agreement and maintains an 

exchange system free of multiple currency practices and restrictions on the making of payments and 

transfers for current international transactions, except for those measures imposed for security 

reasons. The United States notifies the maintenance of measures imposed for security reasons under 

Executive Board Decision No. 144–(52/51). The last of these notifications was made June 19, 2014

(EBD/14/35).
UNITED STATES

INTERNATIONAL MONETARY FUND 3

Article IV Consultation. The 2014 Article IV consultation was concluded on July 23, 2014 and the 

Staff Report was published as IMF Country Report No. 14/221. A fiscal Report of Observance of 

Standards and Codes was completed in the context of the 2003 consultation. 

The 2015 Article IV discussions took place May 11–May 19, 2015. Concluding meetings with 

Chair Yellen of the Board of Governors of the Federal Reserve System, and Treasury Secretary Lew

occurred on June 1 and June 3 respectively. The Managing Director, Ms. Lagarde, the Deputy 

Managing Director, Mr. Zhu, and WHD Director, Mr. Werner, participated in the concluding 

meetings. A press conference on the consultation was held on June 4, 2015. The team comprised 

Nigel Chalk (head), Stephan Danninger, Ravi Balakrishnan, Ali Alichi, Juan Solé, Jarkko Turunen, and 

Andrea Pescatori (all WHD); Per Stefan Laseen (SPR); and Deniz Igan (RES). Ian Parry (FAD), Aditya 

Narain (FSAP head), Martin Cihak and Simon Gray (all MCM) participated in some of the meetings.

Mr. Sobel (Executive Director), Mr. Haarsager (Senior Advisor) and Ms. Douglass Kochman (Advisor) 

attended some of the meetings. Outreach included discussions with Congressional staff, U.S. 

Chamber of Commerce, AFL-CIO, private sector representatives and think tanks. Unless an objection 

from the authorities of the United States is received prior to the conclusion of the Board’s 

consideration, the document will be published.

A Financial System Assessment Program involved two missions, during October–November 2014, 

and February–March, 2015. The Financial System Stability Assessment is scheduled to be discussed 

at the Board, together with the 2015 Article IV Consultation, on July 6, 2015.
UNITED STATES

4 INTERNATIONAL MONETARY FUND

STATISTICAL ISSUES

Statistical Issues. Comprehensive economic data are available for the United States on a timely 

basis. The quality, coverage, periodicity, and timeliness of U.S. economic data are adequate for 

surveillance. The United States has subscribed to the Special Data Dissemination Standard (SDDS) 

and its metadata are posted on the Dissemination Standard Bulletin Board (DSBB).

United States. Table of Common Indicators Required for Surveillance

(As of June 10, 2015)

Date of 

latest 

observation

Date 

received

Frequency 

of data1

Frequency of 

reporting1

Frequency of 

publication1

Exchange rates Same day Same day D D D

International reserve assets and reserve 

liabilities of the monetary authorities2

2015 M5 May 29 M M M

Reserve/base money May 28 May 28 W W W

Broad money May 28 May 28 W W W

Central bank balance sheet May 28 May 28 W W W

Interest rates3Same day Same day D D D

Consumer price index 2015 M4 May 22 M M M

Revenue, expenditure, balance and 

composition of financing4—general 

government5

2015 Q1 June 1 Q Q Q

Revenue, expenditure, balance and 

composition of financing4—central 

government

2015 M5 June 10 M M M

Stocks of central government and central 

government-guaranteed debt

2015 M5 June 4 M M M

External current account balance 2014 Q4 March 19 Q Q Q

Exports and imports of goods and 

services

2015 M4 June 4 M M M

GDP/GNP (2

nd

release) 2015 Q1 May 29 Q M M

Gross External Debt 2014 Q4 March 31 Q Q Q

International Investment Position62014 Q4 March 31 Q Q Q

1 Daily (D), Weekly (W), Biweekly (B), Monthly (M), Quarterly (Q), Annually (A); NA: Not Available.

2

Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

3

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, 

notes and bonds.

4

Foreign, domestic bank, and domestic nonbank financing.

5

The general government consists of the central government (budgetary funds, extra budgetary funds, and social 

security funds) and state and local governments.

6

Includes external gross financial asset and liability positions vis-à-vis nonresidents.
Statement by the IMF Staff Representative on the United States 

July 6, 2015 

1. This statement reports on information that has become available since the staff report 

was issued. It does not alter the thrust of the staff appraisal. 

2. An upward revision to first quarter GDP. Growth in the first quarter was revised 

up to -0.2 percent, suggesting that the temporary factors that hampered growth in the winter 

were a smaller drag than had been previously thought. Staff, however, has maintained its 

annual growth projection for 2015 at 2.5 percent, with recent data pointing to a modestly 

slower second quarter than had been assumed in the forecasts underpinning the staff report. 

3. A generally upbeat picture from other indicators. Recent data releases have shown 

real personal consumption expenditures and consumer sentiment rebounded in May, personal 

income growth remains solid, manufacturing surveys are improving, and housing data shows 

a mild but steady recovery. Inflation continues to be subdued (core PCE inflation was 

1.2 percent in May). Nonfarm payrolls in June added 223 thousand jobs—close to Consensus 

expectations— with the unemployment rate falling to 5.3 percent, mainly reflecting a decline 

in the participation rate. Average hourly earnings slowed to 2.0 percent year-over-year in 

June—0.3 percentage points below Consensus expectations—from 2.3 percent in May. 

4. The Supreme Court ruled on the Affordable Care Act. In a 6-3 decision, the U.S. 

Supreme Court upheld a key provision of the Affordable Care Act. The Court ruled that 

health insurance subsidies should continue to be available for those states that have not set up 

their own health insurance exchanges and are, instead, using the federal exchange. 

5. Trade Promotion Authority was approved by Congress and signed by President 

Obama. The Congress approved Trade Promotion Authority on June 24, allowing for an upor-down vote (so-called “fast track”) on future trade deals. In addition, Trade Adjustment 

Assistance was signed into law, renewing funding for assistance and job training to workers 

displaced by the forces of globalization. This legislation opens the way for a congressional 

vote on the Trans-Pacific Partnership, potentially as early as this Fall. 

6. The Export-Import Bank’s authority to extend new loans, guarantees or credit 

insurance expired on June 30. The bank will, however, continue to operate and manage 

transactions related to its existing portfolio. 

7. Puerto Rico’s fiscal crisis. The fiscal situation in Puerto Rico continues to 

deteriorate, raising concerns that the commonwealth may be unable to service its $72 billion 

in public debt. On July 1 the Puerto Rico Electricity Power Authority reached an agreement 

with its creditors that allowed it to meet a debt service payment that was due that day and 

extended until September 15 a forbearance agreement between the utility and its creditors. 
2 

The bondholders and the utility continue to work on a long-term plan to put the finances of 

the company on a sustainable footing. Puerto Rico’s Governor Padilla announced on June 30 

that the commonwealth’s debts are “not payable” and has established a working group to 

analyze, by August 30, the options for a “complete restructuring and development plan” for 

Puerto Rico. 

8. The impact on the U.S. of recent events in Greece has, so far, been modest. 

Following the Greek government’s call for a referendum, U.S. equity markets fell by around 

2 percent, the 10-year U.S. Treasury rate fell by 10 basis points, and the U.S. dollar 

strengthened around 1 percent versus the Euro.