©2014 International Monetary Fund 

IMF Country Report No. 14/221 

UNITED STATES 

2014 ARTICLE IV CONSULTATION—STAFF REPORT; 

PRESS RELEASE

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 2014 Article IV consultation with United 

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

 Staff Report prepared by a staff team of the IMF, following discussions that ended 

on June 12, 2014, with the officials of United States on economic developments and policies. 

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

completed on July 7, 2014. 

 Informational Annex of July 7, 2014 prepared by the IMF. 

 Staff Statement of July 22, 2014. 

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

July 22, 2014 discussion of the staff report that concluded the Article IV consultation. 

The document listed below has been or will be separately released. 

 Selected Issues Paper 

 

 The publication policy for staff reports and other documents allows for the deletion of marketsensitive information. 

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 2014 
UNITED STATES

UNITED STATES

STAFF REPORT FOR THE 2014 ARTICLE IV CONSULTATION

Focus. The 2014 Article IV Consultation focused on five broad themes to strengthen the 

recovery and improve the long-term outlook: raising productivity growth and labor force 

participation, confronting poverty, keeping public debt on a sustained downward path, 

smoothly managing the exit from zero policy rates, and securing a safer financial system.

Main policy issues.

 Policies are needed to boost longer-term potential output through investments in 

infrastructure, raising educational outcomes, improving the tax structure, and 

developing and expanding a skilled labor force (including through immigration 

reform, job training, and providing childcare assistance for working families).

 Forging agreement on a credible, medium-term consolidation plan should be a high 

priority and include steps to lower the growth of health care costs, reform social 

security, and increase revenues. In the absence of such a comprehensive agreement,

efforts should still focus on identifying more modest opportunities to relax the nearterm budget envelope, paid for with future fiscal savings.

 An enduring consequence of the past recession has been a jump in the number of 

families living in poverty. Improved employment prospects and economic growth will 

be essential to reverse this upward movement. An expansion of the Earned Income 

Tax Credit and an increase in the minimum wage should also be part of the solution.

 The goal for monetary policy is to manage the exit from zero interest rates in a 

manner that allows the economy to converge to full employment with stable prices 

while avoiding financial instability and negative spillovers to the global economy. This 

is a complex undertaking. To facilitate it, steps could be taken to expand the Fed’s 

communications toolkit so as to provide greater clarity on how the Federal Open 

Market Committee assesses progress toward its longer-run goals.

 Continued regulatory oversight is needed to counter the emergence of financial 

imbalances, particularly those that may be growing outside of the banking system. 

Policies should also be deployed to keep mortgage credit accessible and attract more 

private capital into housing finance while minimizing risks to taxpayers.

 The U.S. external position is assessed to be broadly consistent with medium-term 

fundamentals and desirable policies.

July 7, 2014
UNITED STATES

2 INTERNATIONAL MONETARY FUND

Approved By Discussions took place in New York (April 30–May 2) and 

Washington, D.C. (May 5–23). Concluding meetings with Chair Yellen

and Secretary Lew took place on June 12, 2014. The team comprised 

N. Chalk (head), R. Cardarelli, R. Balakrishnan, F. Columba, D. Igan, 

L. Lusinyan, J. Solé, J. Turunen (all WHD), D. Jones (MCM), and 

N. Westelius (SPR). S. Gray, J. Kiff, D. King (all MCM), S. Dawe, 

E. Mathias (all LEG), and M. Ruta (SPR) participated in some of the 

meetings.

Alejandro Werner and 

Tamim Bayoumi

AN INTERMISSION IN THE RECOVERY _________________________________________________________4

BETTER TIMES AHEAD___________________________________________________________________________5

CONFRONTING POVERTY _____________________________________________________________________ 13

COUNTERING THE DECLINE IN POTENTIAL GROWTH_______________________________________ 14

PUTTING PUBLIC DEBT ON A DOWNWARD PATH __________________________________________ 21

THE PATH TO LIFT-OFF________________________________________________________________________ 24

SECURING A SAFER FINANCIAL SYSTEM _____________________________________________________ 28

STAFF APPRAISAL _____________________________________________________________________________ 36

BOXES

1. How Reversible is the Decline in U.S. Labor Force Participation? _______________________________7

2. External Sector Assessment____________________________________________________________________11

3. The Earned Income Tax Credit and the Minimum Wage—A Package__________________________15

4. Productivity Growth and Its Determinants: Evidence from the U.S. States _____________________19

5. The Impact of Fed’s Forward Guidance ________________________________________________________27

6. The Foreign Bank Organizations (FBO) Rule ___________________________________________________34

FIGURES

1. Recent Indicators Suggest a Pick-up in Growth_________________________________________________6

2. Policy Priorities for Boosting Potential Growth ________________________________________________17

3. Credit Market Risks____________________________________________________________________________31

TABLES

1. Selected Economic Indicators _________________________________________________________________39

2. Balance of Payments __________________________________________________________________________40
UNITED STATES

INTERNATIONAL MONETARY FUND 3

3. Federal and General Government Finances ____________________________________________________41

4a. General Government Statement of Operations_______________________________________________42

4b. General Government Financial Assets and Liabilities _________________________________________43

ANNEXES

I. Risk Assessment Matrix: Potential Deviations from Baseline ___________________________________44

II. Public Debt Sustainability Analysis (DSA) ______________________________________________________46

III. U.S. Responses to Past Policy Advice__________________________________________________________53

IV. External Stability Assessment _________________________________________________________________54
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4 INTERNATIONAL MONETARY FUND

AN INTERMISSION IN THE RECOVERY 

1. Overview. Economic activity in the U.S. accelerated in the second half of 2013, but an 

unusually harsh winter conspired with other factors—

including a still-struggling housing market, an inventory 

correction, and slower external demand—causing momentum 

to fade. This led to the first quarterly contraction since early 

2011. 

2. Housing. After a promising recovery in housing 

activity for most of 2013, the past several months have seen a 

retreat characterized by weaker housing starts, declining 

residential investment, and subdued home sales. New 

mortgage origination has been particularly sluggish as credit 

availability remains constrained for lower-rated borrowers 

and mortgage rates have moved up by around 70 basis 

points from a year ago. 

3. Corporate investment. Business investment growth 

has weakened over the last two years, held back by 

uncertainty about the strength of future demand. Even after 

adjusting for the lower growth rate of the labor force, capital 

accumulation per worker has been disappointing throughout

the recovery, and the average age of the non-residential 

capital stock is at a 40-year high.

4. Inventories. The second half of 2013 saw a significant 

build-up in inventories that was broad-based across various 

industries. This over-accumulation was corrected in the first 

quarter of 2014 causing the drag to growth from inventories 

alone to amount to 1.7 percentage points on an annualized 

basis.

5. Net exports also weighed heavily on activity in the 

first quarter of the year, detracting 1.5 percentage points of 

growth (annualized). This negative contribution followed a 

surge in exports in the last quarter of 2013.

-4

-2

0

2

4

-4

-2

0

2

4

2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 

(forecast)

Residential investment 

Non-residential investment

Change in private inventories

Net exports

Personal consumption expenditure

Government consumption and investment

Real GDP 

growth

Sources: BEA; IMF staff estimates.

Contribution to GDP Growth

(percent change from previous quarter) 

-4

-3

-2

-1

0

1

2

3

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

2012 2013 2014

Housing

Existing home sales 

(percent change, 3 

MMA, RHS)

Real residential investment

(contribution to growth, LHS)

Sources: BEA;, Haver Analytics; IMF staff estimates.

-1

0

1

2

3

4

5

14

15

16

17

18

1960 1968 1976 1984 1992 2000 2008

Average age (in years, LHS)

Capital per potential worker (annual change, RHS)

Private Fixed Non-Residential Assets

Sources: BEA; IMF staff estimates.
UNITED STATES

INTERNATIONAL MONETARY FUND 5

BETTER TIMES AHEAD

6. The growth outlook. Activity is projected to

accelerate in the remainder of this year to above 

potential (in the 3–31⁄2 percent range). Still, the drag 

on growth from the first quarter contraction will not 

be offset. This means growth for the year as a whole 

will be a disappointing 1.7 percent. Nevertheless,

barring unforeseen shocks, growth should accelerate 

in 2015 to the fastest annual pace since 2005. 

7. A number of factors underpin this 

baseline (Figure 1):

 A steadily improving labor market. Job growth 

has been reasonably healthy with over one 

million jobs created since January 2014. 

However, the labor force participation rate at June stood at 62.8 percent (its lowest level since 

1978). This combination of decent job growth and

declining participation has allowed the 

unemployment rate to fall rapidly (reaching 6.1

percent in June). Going forward, the pace of decline 

in the unemployment rate is expected to moderate.

However, real wages should slowly rise alongside 

steady employment growth with around one-third 

of the post-recession decline in the participation 

rate expected to be reversed (Box 1). This 

strengthening of the labor market should underpin 

growth in the coming quarters.

(percent) 2013 2014 2015

Actual

GDP growth 1.9 1.7 3.0

o/w: 

Personal consumption1 1.4 1.5 2.0

Residential investment1 0.3 0.1 0.4

Equipment investment1 0.2 0.2 0.4

Government spending1-0.4 -0.2 0.1

Net exports1 0.1 -0.2 -0.2

Output gap2 -3.8 -4.0 -2.9

CPI inflation3 1.5 1.9 1.8

PCE inflation3 1.2 1.6 1.5

Unemployment rate3 6.7 6.2 5.9

10-yr Treasury yield3 3.0 2.9 3.6

Source: IMF staff estimates.

1Contribution to growth.

2 Percent of potential GDP.

3

 End of period.

Summary of Macroeconomic Forecast

Proj.

-1000

-800

-600

-400

-200

0

200

400

600

61

62

63

64

65

66

67

2006 2007 2008 2009 2010 2011 2012 2013 2014

Monthly payroll growth (thousand, RHS)

Labor force participation rate (percent,LHS)

Labor Market

Sources: BEA;IMF staff estimates.
UNITED STATES

6 INTERNATIONAL MONETARY FUND

Figure 1. Recent Indicators Suggest a Pick-up in Growth

Consumer confidence continues to strengthen. Businesses activity and prospects are also improving.

Durable goods and capital expenditures are recovering

from the winter pause... ...as are retail and wholesale sales.

Housing activity is regaining momentum. Businesses expect stronger exports and inventory 

accumulation in the months ahead.

Sources: BEA, Federal Reserve, Haver Analytics; IMF staff estimates.

55

65

75

85

95

55

65

75

85

95

Jan.13 Apr.13 Jul.13 Oct.13 Jan.14 Apr.14

Consumer confidence

Consumer expectations

Consumer Sentiment Indices

(SA, 1985=100)

Government 

Shutdown

85

90

95

100

50

52

54

56

58

60

Jan.13 May.13 Sep.13 Jan.14 May.14

NFIB: Small Business Optimism Index (SA, 1986=100, RHS) 

ISM Composite Index (SA, >50=increasing, LHS) 

Business Sector

800

900

1,000

1,100

1,200

4,500

4,700

4,900

5,100

5,300

5,500

Jan.13 May.13 Sep.13 Jan.14 May.14

Housing Starts (RHS) Total Existing Home Sales (LHS) 

Housing Activity

(SAAR, thosand units)

-8

-6

-4

-2

0

2

4

6

50

52

54

56

58

60

62

Jan.13 May.13 Sep.13 Jan.14 May.14

Net percent of firms planning to add inventories (percent, RHS) 

ISM New Export Orders Index (>50=increasing, LHS) 

Exports and Inventories

70

72

74

76

78

210

220

230

240

250

Jan.13 May.13 Sep.13 Jan.14 May.14

New orders: durable goods (LHS)

Shipments: nondefense capital goods (RHS)

Manufacturers' New Orders and Shipments

(billion dollars)

15.0

15.5

16.0

16.5

17.0

99

101

103

105

107

109

111

Jan.13 May.13 Sep.13 Jan.14 May.14

Total vehicle retail sales (mil. units, RHS) 

Merchant wholesalers sales of nondurable goods (LHS)

Retail sales & food services (excl. motor vehicles & parts dealers, LHS)

Retail and Wholesale Sales

(Jan.2013=100)
UNITED STATES

INTERNATIONAL MONETARY FUND 7

Box 1. How Reversible is the Decline in U.S. Labor Force Participation? 1/

The U.S. labor force participation rate (LFPR) fell by 

around 3 percentage points since 2008 and has yet 

to recover. The falling LFPR is, however, not a recent 

phenomenon. Labor force participation increased 

sharply since the early 1960s (as the baby boom 

generation reached adulthood and women became 

more represented in the workforce) but then leveled 

out (reaching an all-time high at 67.3 percent in 

2000) and subsequently entered a secular decline

(following the 2001 recession). This downward 

movement accelerated following the global financial 

crisis.

LFPR dynamics are a complex combination of both structural factors (population aging or delayed

retirement) and cyclical factors (largely related to the availability of jobs). Staff’s demographic 

models suggest that aging explains around 50 percent of the LFPR decline since 2007. State-level 

panel regressions suggest that the cyclical effect accounts for a further 30–40 percent of the 

decline.

The remainder reflects a number of forces at work. For example, the bulk of the decline in youth 

participation has been driven not by an increase in college enrollment but by a decline (from 43 to 

37 percent since 2007) in the number of students that are working. It is unclear how much of this 

effect will be reversed as the economy improves. Regarding disability insurance, although 

applications rose following the recession, acceptance rates have fallen. Despite this, disability 

dynamics are still having an impact on the LFPR: even those denied benefits are likely to exit the 

labor force while their application is pending and, because of aging, the share of the total 

population receiving disability insurance has risen. 

Overall, staff analysis suggests that up to one-third of the post-2007 decline is reversible. This 

should mean, over the next 2–3 years, there will be a temporary respite in the secular decline of 

the LFPR. However, after this interim period, participation rates should start declining again as the 

forces of population aging begin to dominate.

1/ See R. Balakrishnan, M. Dao, J. Solé, and J. Zook, “Recent U.S. Labor Force Participation Dynamics: 

Reversible or Not?” Selected Issues Paper, 2014.

58

60

62

64

66

68

58

60

62

64

66

68

1950 1960 1970 1980 1990 2000 2010

Actual

Forecast

Demographics only (from '07)

Labor Force Participation Rate

(percent)

Sources: Bureau of Labor Statistics, Haver Analytics; IMF staff estimates.

2019
UNITED STATES

8 INTERNATIONAL MONETARY FUND

10

12

14

16

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2001 2003 2005 2007 2009 2011 2013 2015

Household formation (million units, LHS)

Household formation: 1991-2007 average (LHS)

25-34 Year-olds living at home (percent of total, RHS)

Household Formation

Sources: Census Bureau, Haver Analytics; IMF staff estimates.

 Better household balance sheets. Since the crisis, total household debt has fallen steadily—albeit 

with growth in student debt and a surge in auto credit—and wealth gains have been propelled 

by rising house prices and a booming stock market. As a result, household net worth as a share 

of disposable income has risen almost back to pre-crisis levels. It is worth noting that the gains in 

net worth have been unevenly distributed with much of the improvement concentrated in the 

top two deciles of the income distribution. Despite this, better balance sheets, rising consumer 

confidence, and the ready availability of consumer credit should support stronger consumption 

growth in the months ahead.

 A healthier housing market. Household formation is expected to resume a steady path back 

toward more normal levels as economic growth, more secure job prospects, and a modest 

improvement in the availability of mortgage credit combine. This, in turn, will create a rising 

demand for housing (both rental and owner-occupied), supporting a steady pick-up in 

residential investment. 

 A need to upgrade the capital stock. With substantial cash holdings, low financing costs, elevated

after-tax profit margins, high rates of capacity utilization, and rising business confidence, it is 

expected that corporations should begin to more assertively upgrade their aging capital stock in 

the coming quarters, causing an improvement in business investment.

15

16

17

18

19

450

550

650

750

1991 1998 2006 2013

Net worth (LHS)

Household Financial Obligation Ratio 1/ (RHS)

Household Financial Health 

(percent of disposable personal income)

Sources: Federal Reserve Board and Haver Analytics.

1/ The Financial Obligation Ratio is the ratio of total required household debt 

payments plus rent on tenant-occupied property and auto lease payments to 

total disposable income.

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

Mar.08 Mar.10 Mar.12 Mar.14

Credit card loans

Auto loans

Student loans

Consumer Credit

(trillion dollars)

Source: Federal Reserve Board.

94

96

98

100

102

104

106

90

92

94

96

98

100

102

104

Nov.13 Jan.14 Mar.14 May.14

Small Business Optimism (RHS)

ISM Composite Index (LHS)

Business Confidence and Production

(index, Nov. 2013=100)

Sources: Institutefor Supply Management ; National Federation of 

Independent Business ; Haver Analytics.
UNITED STATES

INTERNATIONAL MONETARY FUND 9

 A dissipating fiscal drag. After an abrupt fiscal adjustment in FY2013—which indiscriminately cut 

spending and led to a 11⁄2 percent of GDP improvement in the general government primary 

structural balance in CY2013—as well as the political gridlock that led to a partial government 

shutdown at the beginning of FY2014, Congress finally reached a budget agreement in 

December 2013. This agreement partially replaced the automatic spending cuts in fiscal years 

2014 and 2015 with mandatory savings in later years and new revenues from non-tax measures. 

In addition, in February, the debt limit was suspended until March 15, 2015 which helped reduce 

near-term fiscal uncertainties. As a result, for this year and next, the cumulative decline in the 

structural balance is projected to be relatively modest (11⁄4 percent of GDP). This is estimated to 

dampen growth by around 1⁄4 percentage point per year. In addition, for 2014, much of this drag 

has already taken place in the first quarter (when emergency unemployment benefits and bonus 

depreciation both expired). As a result, government spending is expected to add 0.1 percentage 

points to growth in the remainder of 2014.

 Supportive monetary and financial conditions. Since December 2013, the Fed’s Large Scale Asset 

Purchase Program has been scaled back from net 

purchases of $85 to $35 billion per month (as of 

June 2014). At the current pace of withdrawal, asset 

purchases will finish before the end of this year. The 

Fed has indicated, though, that it is prepared to 

maintain the federal funds rate at 0–0.25 percent for 

a considerable period after asset purchases end.

Even after policy rates move away from zero, the 

subsequent pace of interest rate increase is 

expected to be relatively slow. The expectation of 

continued gains in home prices, low term and credit 

premia, buoyant stock market valuations, and a slow 

rise in policy rates should mean financial conditions 

will remain relatively loose for the forseeable future.

8. Global spillovers. The expected acceleration of the U.S. economy in the coming quarters is 

expected to be a positive force for world growth. Specifically, the projected increase in U.S. growth 

should add 0.1–0.25 percentage points annually to (non-U.S.) global growth in 2015–16. Spillovers 

will be largest to those with the strongest trade links (e.g., Canada and Mexico) but other advanced 

economies and emerging markets should also benefit.

98

99

100

101

98

99

100

101

Jun.10 Feb.11 Oct.11 Jun.12 Feb.13 Oct.13 Jun.14

Financial Conditions Index 1/

Sources: Goldman Sachs; Bloomberg L.P.

1/ The index is set to 100 for the average since 2000.

Tighter
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10 INTERNATIONAL MONETARY FUND

9. The output gap and inflation. Inflation outturns remain well below the Fed’s longer-term 

objective but have steadily risen over the past several months. Core personal consumption 

expenditure (PCE) inflation at end-May was 1.5 percent (year on year), with headline PCE inflation 

modestly higher due to rising energy costs. The rise in 

inflation has been underpinned by increasing shelter costs 

and the unwinding of the effects that the 2013 sequester 

had on Medicare costs. There appear to be little sign of labor 

market tightness or rising wage costs. Around 41⁄2 percent of 

the workforce are still involuntarily working part-time, and a 

broad measure of the “employment gap” (i.e., one that 

combines information on unemployment, 

underemployment, and the potential unwinding of the fall in 

the participation rate) suggests that the current level of labor 

market slack is still significant and will take 3–4 years to be 

exhausted. As a result, the output gap is estimated at close 

to 4 percent at end-2013 (and is expected to take until 2018 to close). As a consequence, PCE 

inflation is forecast to be 1.6 percent at end-2014 and gradually converge (from below) to the Fed’s 

longer-term objective of 2 percent. There is, however, significant uncertainty surrounding these 

forecasts. If the short-term unemployment rate (which has fallen to 4.1 percent by May 2014, and is 

close to pre-crisis levels) were to be a more relevant driver of wages—as some researchers have 

claimed—then inflation could become more evident at an earlier stage.

10. The external accounts. The current account deficit is expected to slowly widen as a stronger 

demand for imports is only partially offset by fiscal consolidation and the improvement in the trade 

balance that is linked to a rising self-sufficiency in energy. The strong performance of U.S. asset 

markets and the persistent current account deficit are expected to lead to a continued worsening of 

the net international investment position (from -27 to -33 percent of GDP over the next five years).

-1

0

1

2

3

4

-1

0

1

2

3

4

2007 2009 2011 2013 2015 2017 2019

Employment Gap

(percent)

Participation gap

Part-time gap

Unemployment gap

Sources: BLS; IMF staff estimates.

-5

-4

-3

-2

-1

0

1

2

0.0

0.5

1.0

1.5

2.0

2.5

2012 2013 2014 2015 2016 2017 2018 2019

Output Gap and Inflation

(percent change)

Output gap (percent of potential, RHS)

PCE inflation (LHS)

Sources: BEA; Haver Analytics; IMF staff estimates.

0

1

2

3

4

0

1

2

3

4

2008 2011 2014

Employment Cost Index

Average hourly earnings

Compensation per hour (6-quarter moving average)

Nominal Wages

(percent change, year over year)

Sources: BLS; Haver Analytics.
UNITED STATES

INTERNATIONAL MONETARY FUND 11

The U.S. external position and the assessed imbalances and fiscal policy gaps have improved 

considerably in recent years, with positive implications for the global economy. Despite the cyclicallyadjusted current account being somewhat on the weaker side, the U.S. external position is assessed 

to be broadly consistent with medium-term fundamentals and desirable policies (Box 2).

Box 2. External Sector Assessment 1

The current account deficit fell to 2.3 percent of GDP in 2013, continuing its descent from the 

6 percent of GDP peak reached in 2006. The decline has 

been due to a falling fiscal deficit, higher private saving,

and lower investment in the aftermath of the financial 

crisis. This shift has been helped by the expansion in 

unconventional energy production and increased 

energy independence. The weaker real exchange rate 

has also supported export growth (in 2013 the REER was 

around 10 percent below its average value over the past 

two decades).

The net international investment position declined 

from -15 percent of GDP in 2010 to -27 percent of GDP 

in 2013, reflecting the current account deficit and the stronger performance of the U.S. stock market 

relative to global markets. Gross assets and liabilities are 131 and 158 percent of GDP, respectively. The 

U.S. has a positive net equity position vis-à-vis the rest of the world, sizable portfolio equity and direct 

investment abroad, and a negative debt position owing to sizeable foreign holdings of U.S. Treasuries 

and corporate bonds. 

The External Balance Approach (EBA) estimates 

the cyclically adjusted CA deficit to be about 1 

percent of GDP weaker than the level implied by 

medium-term fundamentals and desirable 

policies. This would suggest some overvaluation 

of the U.S. dollar (in the 0 to 10 percent range). 

However, direct analysis of the REER in the EBA 

would suggest an undervaluation of around 8 percent in 2013. 

Capital and financial inflows and outflows rose in 2013 but are substantially lower than pre-2008 

levels. Portfolio inflows halved in 2013, relative to 2012, but were more than offset by stronger bank 

inflows. At the same time, there has been a sizable increase in U.S. overseas portfolio investments. The 

U.S. dollar’s reserve currency status continues to support foreign demand for U.S. securities.

1

This box draws on the 2014 External Sector Report. See also Annex IV.

90

110

130

150

-6

-5

-4

-3

-2

-1

0

1

1981 1989 1997 2005 2013

Current account (percent of GDP, LHS)

REER (2010=100, RHS)

Current Account and Exchange Rate

Source: IMF.

 CA 

Regression 

 REER 

Regression

CA Norm (percent of GDP) -2.1

CA Gap (percent of GDP) -1

Exchange rate gap (percent) 8 -8

External Balance Assessment Results

Source: 2014 External Sector Report.
UNITED STATES

12 INTERNATIONAL MONETARY FUND

11. What could go wrong domestically? There continue to be important uncertainties 

surrounding the baseline growth forecast (see Annex I) including whether the slowdown in growth 

earlier in the year will prove to be more permanent than is currently assessed. In terms of specific 

domestic risks, interest rates could rise more rapidly—either because of an unanticipated shift in the 

Fed’s position, or markets unwinding the recent compression in volatility, term premia, and credit 

spreads. This could instigate bouts of financial volatility with damaging implications for U.S. growth. 

Alternatively, a continuation of low interest rates could foster a build-up of greater systemic financial 

stability risks. The return of fiscal uncertainties in 2015—for example, linked to renewed 

disagreement on the debt limit or the budget—would create downside risks. Over a longer horizon, 

a delay in putting in place a credible medium-term fiscal consolidation plan has the potential to

precipitate a loss of confidence and an increase in the sovereign risk premium.

12. Global spillovers. Given the size and importance of the U.S. economy, all of the domestic 

risks described above, if realized, would have significant implications for the world economy. For 

example, a rapid increase in interest rates that is not backed by stronger U.S. growth would have 

negative consequences for global growth, particularly for those emerging markets with weaker 

fundamentals. A one percentage point increase in the U.S. term premium could reduce growth in the 

rest of the world by around 0.2 percent (see the 2014 Spillover Report). Similarly, the low-probability 

but high-impact risk of U.S. bond market distress could generate a peak world output loss of 3.4–

6.0 percent (see the 2012 Spillover Report).

13. What are the main risks from abroad? The principal external risk to the U.S. recovery 

comes from a more pronounced synchronized slowdown in emerging market economies (including

in China). A one percentage point fall in emerging market growth could lower U.S. growth by 

0.1 percent over a year (see the 2014 Spillover Report). If increasing geopolitical tensions 

surrounding Ukraine or Iraq were to lead to global financial and trade disruptions, higher commodity 

prices, and safe-haven capital flows, then the U.S. dollar would appreciate and growth could fall by 

up to 0.2–0.8 percent in 2014–15, depending on the severity and longevity of the disruption.

14. What are the upsides? Non-residential private investment growth is conservatively forecast 

to be lower than predicted by staff investment models. As 

a result, the recovery in private investment could be 

stronger as confidence about future economic prospects 

grows. There could also be a more energetic rebound in

the participation rate than is currently envisaged by staff. 

This would raise labor incomes and add to consumer 

demand. Finally, the large destocking that occurred in the 

first quarter may mean that a rebuilding of inventories in 

the coming months may provide some upside to growth 

in 2014. Overall, the distribution of risks around the 

baseline forecast is believed to be broadly balanced for 

2014–15.

-30

-20

-10

0

10

20

-30

-20

-10

0

10

20

2001 2003 2005 2007 2009 2011 2013 2015

Actual and projections

Model fitted values 1/

Real Private Non-Residential Fixed Investment 

(percentage change, q/q saar)

Sources: BEA; Haver Analytics; IMF staff estimates.

1/ Fitted values from staff model of business investment; regressors include 

corporate profits, personal consumption growth, and labor force growth.
UNITED STATES

INTERNATIONAL MONETARY FUND 13

15. Authorities’ views. The authorities believed the weak first quarter growth outturn was a 

temporary aberration and partly a weather-related phenomenon. They recognized, though, that this 

meant 2014 growth would likely come in somewhat below their most recent public forecasts. 

However, they underlined that solid fundamentals and significant policy efforts to support the 

recovery would mean that there was a strong possibility that growth could surprise on the upside in 

the coming quarters. They agreed on the nature of the principal risks facing the U.S. economy but 

saw a relatively remote likelihood that the downside domestic risks highlighted by staff would 

materialize and were more concerned over the risks that could accompany the recent decline in 

market pricing of volatility. They pointed, also, to concerns over Europe’s nascent recovery and 

weaker growth in emerging markets, particularly risks emanating from China linked to either a 

sharper slowdown and/or financial sector stresses. The authorities envisaged a slow rise of inflation 

to the Fed’s 2 percent objective and a gradual increase in long-term interest rates to around 5 

percent over the medium-term.

CONFRONTING POVERTY

16. The task at hand. Almost 50 million Americans were living in poverty in 2012, as measured 

by the Census Bureau’s supplemental poverty measure.

Poverty rates are higher for children under 18 years and 

for single-parent households (particularly those headed 

by single mothers). As troubling as the level of poverty 

is, perhaps of more concern is the fact that the official 

poverty rate has been stuck at about 15 percent since 

the recession, even though the economy has been 

recovering and average incomes and employment are 

now both above the levels which prevailed in 2007. 

Lowering poverty will require a sustained improvement 

in the economy and in employment opportunities. 

However, it will also require policy efforts to raise real 

wages at the bottom end of the distribution and to provide a greater transfer of fiscal resources to 

society’s poorest.

17. Supporting the poor. While 

not a full solution to rising poverty, 

much can be achieved by further 

expanding the Earned Income Tax 

Credit (EITC) for workers without 

dependents, low-income youth, and 

those older workers not yet eligible for 

social security. In addition, the 

government should make permanent 

the extension of the EITC to larger 

families, the mitigation of the 

20

30

40

50

60

10

12

14

16

2000 2002 2004 2006 2008 2010 2012

Poverty Indicators

Source: Census Bureau.

Note: OPM based on comparison of cash income to a threshold of three times the minimum diet. SPM 

takes into account taxes and transfers, basic needs, place of residence, and whether living in rental unit 

or purchased property.

Percent of total population 

below poverty level (LHS)

Official Poverty Measure (OPM) 

Supplemental Poverty 

Measure

(SPM)

Number of people below 

poverty (million, RHS)

Reduction in Poverty Rate due to EITC, 2012

(percentage point change after EITC is taken into account )

Source: Congressional Research Service analysis of the 2013 Current Population Survey.

-7

-6

-5

-4

-3

-2

-1

0

No children One child Two children Three 

children Single

-7

-6

-5

-4

-3

-2

-1

0

No children One child Two children Three Married children
UNITED STATES

14 INTERNATIONAL MONETARY FUND

“marriage penalty”, and the increase in (and refundability of) the Child Tax Credit, all of which were 

introduced in 2009 and are due to expire in 2017. Such an upgrade of the EITC would have a

relatively low fiscal price tag and would directly target poverty among the working poor while 

encouraging work. Complementing this with an increase in the federal minimum wage would help 

ensure that part of the economic costs of raising the income of the lowest decile is borne by firms

(rather than the budget). It would also forestall the improved EITC from simply lowering the pre-tax 

wage without changing the post-tax income of poor households (Box 3).

18. Authorities’ views. The President’s 2015 Budget underscored the importance of making the 

EITC a more relevant and effective instrument in tackling poverty and in encouraging people to enter 

the workforce. It proposed a doubling of the childless worker EITC as well as making younger adult 

workers eligible for the EITC. The Administration is also committed to increasing the minimum wage. 

It has already required federal contractors to pay at least $10.10 per hour and has called on Congress 

to raise the minimum wage to $10.10 for all workers. There have also been initiatives to increase the 

minimum wage at the state and local levels (as of June 1, 2014, 22 states and the District of Columbia 

have minimum wages above the federal minimum). Officials agreed that making progress on both 

the EITC and minimum wage would be a preferred combination but also regarded passage of either 

in isolation as a valuable step to ensuring that hard work pays off for all citizens and that poor 

families are able to make ends meet.

COUNTERING THE DECLINE IN POTENTIAL GROWTH

19. Pressures on labor supply and labor 

productivity. U.S. potential growth is expected to level off 

at around 2 percent in the coming years. This is well below 

the average potential growth rate of over 3 percent seen in 

the decade before the financial crisis. The main drag to 

potential growth is expected to come from:

 A slower expansion of the labor force given population 

aging. Under current policies, the labor force is 

expected to expand at a slow pace (of below 1⁄2 percent 

per year), half the average growth rate seen in 2000–13 

and well below the average (1.2 percent) growth seen 

over the past 30 years.

-2

-1

0

1

2

3

4

5

-2

-1

0

1

2

3

4

5

1991 1995 1999 2003 2007 2011 Avg 

2016-19

Capital deepening Labor contribution

TFP Potential output

Sources: BEA; IMF staff estimates.

Potential Growth Decomposition

(percent)
UNITED STATES

INTERNATIONAL MONETARY FUND 15

Box 3. The Earned Income Tax Credit and the Minimum Wage—A Package 

“In-work” tax credits such as the Earned Income Tax Credit (EITC) in 

the U.S. are aimed at stimulating labor force participation and 

providing income support. More than half of advanced economies 

use such credits.1In the U.S., the credit is phased out as family

income rises and also varies with the number of dependents in the 

household. This generates both a “marriage penalty” (the income of 

one partner can make the other ineligible for the credit) and 

potentially negative effects on labor supply (since the marginal tax 

rate, when adding in the loss of the EITC, can be very high for the 

second earner). The complexity of eligibility for the EITC has also 

been criticized for leading to high error rates and improper 

payments.2

The minimum wage aims to ensure that low-wage, low-skill workers 

can afford a basic standard of living. Such wage floors have been 

shown to raise labor force participation at the margin, reduce poverty, and sustain 

aggregate demand. However, these benefits may be offset if the floor is set so 

high as to significantly discourage employers from hiring. The minimum wage in 

the U.S. is 37.8 percent of the median wage, low by international standards (the 

OECD average is 47.1 percent of the median wage). Despite periodic increases, 

inflation has meant the minimum wage has been on a broadly downward trend in 

real terms since 1968. In 2012, there were 3.6 million hourly paid workers in the 

U.S. with wages at or below the federal minimum wage of $7.25 per hour; a 

further 13 million earn below $10 per hour. Slightly more than half of these workers were employed in the leisure 

and hospitality industry.

Despite the potential downsides associated 

with both the minimum wage and the EITC, 

a combination of the two can have 

important complementarities and ensure 

that more of the EITC benefits accrue to 

the worker.3 On its own, a minimum wage 

hike can be a poorly targeted instrument 

because part of the benefits of a higher 

minimum wage accrues to higher-income 

households (the CBO calculates that only a 

fifth of increased earnings from the 

minimum wage goes to families living 

below the poverty threshold). On the other 

hand, an expansion in the EITC could put 

downward pressure on pre-tax wages and 

dilute the benefits to poor households (the increase in after-tax income is only 73 cents for every dollar spent on 

the EITC4). The estimated effects of implementing both an expanded EITC and higher minimum wage are 

summarized in the text table. 

1

See IMF, “Fiscal Policy and Employment in Advanced and Emerging Economies,” 2012.

2

See GAO, “Improper Payments: Remaining Challenges and Strategies for Governmentwide Reduction Efforts,” 2012.

3

See O. Blanchard, F. Jaumette, and P. Loungani, “Labor Market Policies and IMF Advice in Advanced Economies During the 

Great Recession,” 2013; CBO, “The Effects of a Minimum-Wage Increase on Employment and Family Income,” 2014.

4 See J. Rothstein, "Is the EITC as Good as an NIT? Conditional Cash Transfers and Tax Incidence," 2010.

Employment 

effect

Average increase in 

take-home pay of 

poor households

Reduction in 

official poverty 

rate

($ over 10 

years)

(percent 

of GDP)

(thousands)

(percent of average 

after-tax income)

(percentage 

points)

Make permanent the extension of 

the EITC to larger families, the 

mitigation of marriage penalty, 

and the increase in CTC (due to 

expire in 2017)

97.4 

billion

0.04

Increase of about 

40

6.8 0.5

Double the maximum EITC 

benefits for individuals without 

dependents and expand EITC 

benefits to workers aged 21-24

59.7 

billion

0.03

Increase of about 

20

4.4 0.4

Raise the federal minimum wage 

from $7.25 to $10.10

Decrease of 

about 500

2.6 0.3

Combination of all 146.9 

billion

0.06 Decrease of 

about 400

9.7 1.0

Fiscal cost

Policy measure

Sources: OMB, CBO, JCT, Brookings Institution, Urban Institute; IMF staff calculations.

Negligible

Possible Effects of Poverty-Reducing Policy Alternatives

30

40

50

60

70

30

40

50

60

70

1960 1970 1980 1990 2000 2010

Minimum Wage 

(percent of median wage)

OECD

United States

Source: OECD.

Czech Rep. 36

Japan 38

Korea 42

Canada 45

UK 47

Australia 53

France 62

Source: OECD.

(percent of median wage, 2012)

Minimum Wage 
UNITED STATES

16 INTERNATIONAL MONETARY FUND

0

40

80

120

160

200

0

40

80

120

160

200

Pages (thousands) Tax expenditures Temporary tax 

provisions

1986 2013

Complexity of the Tax Code

(number)

Sources: U.S. Congress, Joint Committee on Taxation.

5.0

5.5

6.0

6.5

5.0

5.5

6.0

6.5

Germany Japan United 

States

United 

Kingdom

Korea

2006-2007 2013-2014

Quality of Infrastructure

(score 1-7 best)

Source:Global Competiveness Index, World Economic Forum.

 A slowdown in productivity. Recent years have seen a step-down in labor productivity. This has 

been largely attributed to a smaller contribution from 

capital deepening and total factor productivity linked to 

information technology (IT). There is substantial 

uncertainty as to whether this decline in labor productivity 

is going to be a long-lasting phenomenon (e.g., due to a 

diminished pace of IT innovation) or will be partly reversed 

by newer technological innovations, efficiency gains in 

infrastructure, and productivity effects from the ongoing 

energy boom. At this stage, the evidence makes it 

impossible to distinguish between these two possibilities. 

Staff’s current forecasts assume a middle ground: a partial 

rebound in labor productivity growth (as measured by 

non-farm business sector output per hour worked) from 0.5 percent in 2013 (the slowest growth 

rate since 1993) to around 1.6 percent by the end of the decade (still substantially 

underperforming the average 23⁄4 percent productivity gains seen between 1998 and 2007).

20. Policies. Tempering the pace of decline in long-term 

growth will depend critically on policies that build the (public 

and private) capital stock, reverse the downswing in 

productivity growth, and raise labor force participation

(Figure 2). Priorities should include: 

 Galvanizing infrastructure investment. The government 

capital stock ratio has resumed the downward trend that 

began in the 1980s. Additional investment is urgently 

required to improve the quality of infrastructure, 

particularly for surface transportation. Indeed, the American 

Society of Civil Engineers estimates that $200 billion (about 

1.1 percent of GDP) in funding is necessary to meet the U.S. 

infrastructure investment needs from 2014 to 2020. 

Providing clarity on future financing of the Highway Trust 

Fund is a near-term priority. However, this should be viewed 

only as a first step. Action is also needed to achieve a 

sustained increase in both federal and state spending on 

infrastructure paid for by savings in future entitlement 

outlays, the raising of additional revenues, and an expansion 

of infrastructure financing sources (including innovations 

such as the America Fast Forward Bonds).

1

 

1

Under this program, the federal government would provide subsidy payments to state and local governments that 

equals 28 percent of their interest costs on bonds used to finance infrastructure projects and 50 percent if the bonds 

are issued in 2014 and 2015 to finance the building of schools.

0

1

2

3

4

5

0

1

2

3

4

5

1983 1987 1991 1995 1999 2003 2007 2011 2015 2019

Labor Productivity Growth

(percent change, non-farm business sector)

Sources: BLS; IMF staff estimates.

Period 

average
UNITED STATES

INTERNATIONAL MONETARY FUND 17

Figure 2. Policy Priorities for Boosting Potential Growth 

There is scope to strengthen active labor market policies to 

increase labor supply...

... and tackle other disincentives to work, especially for 

women with children (e.g. through childcare assistance 

and tax code changes).

Attracting high-skilled workers through immigration 

reform would increase labor supply and boost productivity. More impactful education expenditures ...

... together with incentivizing greater public and private 

investment in research and development ...

... would add to productivity and allow states to move 

closer to the production frontier.

Sources: Department of State, Department of Education, Organization for Economic Cooperation and Development; IMF staff estimates

1/ Inactivity rate on the y-axis is the proportion of the population that is not in the labor force.

0 0.5 1 1.5 2 2.5

MEX

USA

CAN

JPN

ITA

OECD

CHE

AUT

DEU

ESP

FRA

FIN

SWE

NLD

BEL

DNK

Spending on Active Labor Market Policies, 2011

(percent of GDP)

More spending

0

20

40

60

80

100

120

0

20

40

60

80

100

120

Min

OECD 

Average

USA

Max

Implicit Tax on Returning to Work for Second Earners

(percent of gross earnings in new job)

0

4

8

12

16

20

1999 2001 2003 2005 2007 2009 2011 2013

0

50

100

150

200

250

Nonimmigrant (H1B, thousands, LHS)

Immigrant (EB1-3, thousands, LHS)

Skilled worker visas in percent of recent college graduates (RHS)

Skilled Worker Visa Issuance

USA

EU21 OECD

5

10

15

20

25

5

10

15

20

25

14.5 15.0 15.5 16.0

Ratio of students to teaching staff

Education Spending and Outcomes

Bubble size = annual spending 

per student in PPP US$. Inactivity rate 1/ 

(percent)

0

4

8

12

16

0

4

8

12

16

USA OECD

1999 2013

Generosity of R&D Tax Incentives

(cents of incentive per $1 of R&D outlays)

AK

CA

DE

DC

NY

OK SD OR

TX WV

WY

AK

CA

DE DC

NY

NC

OK

OR

SD

TX

WV

WY

40

60

80

100

120

140

160

4 0

6 0

8 0

100

120

140

160

0 50 100 150 200

Actual in 1996

Actual in 2010

Capital per worker

Output per worker

Production Frontier, 1996 vs. 2010

(thousands of real 2005 dollars)
UNITED STATES

18 INTERNATIONAL MONETARY FUND

 A better tax system. A reform of the U.S. tax code is long overdue, as complexity and loopholes 

have increased over the years. The Joint Committee on 

Taxation estimates that a comprehensive tax reform—

that involves broadening bases and simplification and 

reduction of statutory tax rates for individual and 

corporate income tax—would raise the level of real GDP

by up to 1.6 percent over the next ten years. Such a 

reform would also support medium-term fiscal 

adjustment and facilitate a more equitable distribution of 

income. On both efficiency and distributional grounds, 

the individual income tax base should be broadened 

through a reduction in exemptions and deductions. In 

particular, itemized deductions for the individual income tax—including the mortgage interest 

deduction—should, over time, be either capped or eliminated. On the corporate side, there is 

scope to broaden the base (by cutting back on the value of various tax exclusions and 

deductions), lower the marginal corporate tax rate, and change the tax treatment of 

multinational corporations to limit base erosion and profit shifting.

2

 Incentivizing innovation and building skills. Fiscal measures should focus on incentivizing research 

and development including by reinstating and making permanent the Research and 

Experimentation (R&E) tax credit that expired in December 2013. Progress can be achieved in 

closing skills gaps over the near term by improving training programs conducted at the state 

level, building partnerships with industry and higher education institutions for apprenticeships 

and vocational training, and improving government-provided job search assistance. Over a 

longer horizon, skills development will require better spending on education to raise educational 

outcomes through prioritizing early childhood education (including universal pre-K) and giving

more support for science, technology, engineering, and math programs (Box 4).

 Boosting labor supply and reducing long-term unemployment. In addition to expanding the EITC, 

increased labor force participation could be achieved through better family benefits (including 

childcare assistance) to reverse the downward trend in female labor force participation. 

Moreover, the disability insurance program could be modified to provide incentives for 

beneficiaries to work part-time (rather than drop out of the labor force). Potential output would 

also benefit (through both labor supply and productivity effects) from reaching an agreement on 

immigration reform that provides greater opportunities for high-skilled workers to work in the 

United States. Finally, to accelerate the progress in lowering unemployment and to counter 

stigma effects, time-bound tax credits or wage subsidies could be offered to those employers 

who hire the long-term unemployed.

 

2

See T. Matheson and J. Grigg, “Raising Revenues from U.S. Personal Income Tax Expenditures” and “International 

Spillovers from U.S. Corporate Tax Reform,” in IMF Country Report No. 12/214, for an extensive discussion.

0 100 200 300

Employer-sponsored health 

insurance

Net pension contributions 

and earnings

Capital gains on assets 

transferred at death

State and local taxes

Mortgage interest

Preferential tax rates on 

capital gains and dividends

Lowest quintile

Second quintile

Middle quintile

Fourth quintile

Highest quintile

Size and Distribution of Selected Major Tax 

Expenditures by Income Group

(fiscal year 2013, billion dollars)

Source: Congressional Budget Office. 
UNITED STATES

INTERNATIONAL MONETARY FUND 19

Box 4. Productivity Growth and Its Determinants: Evidence from the U.S. States1

Aggregate total factor productivity (TFP) growth slowed in the mid 2000s, well before the financial 

crisis. Some argue that part of the decline was due to the information and technology (IT) 

revolution having run its course, while others maintain that the IT revolution has still a long way to 

go, and could continue to boost U.S. TFP growth in the future.2

Examining TFP growth across U.S. states suggests that the productivity slowdown is less related to 

the IT cycle than is commonly thought. The change in TFP growth over 2005–10 (relative to 1996–

2004) varied from over 3 percentage points in New Mexico and South Dakota to below 

1 percentage point in states like Washington, Oregon, Nebraska, Maryland, and others. However, 

there is little evidence to suggest the TFP slowdown was stronger in those states that were either 

specialized in IT 

production or that used 

IT more intensively. 

TFP growth reflects not 

only technological 

innovation but also the 

efficiency of production 

which, in turn, is linked 

to education, R&D 

spending, and the 

concentration of 

financial services. Using 

a stochastic frontier 

analysis, staff 

decomposes TFP 

dynamics into the contributions from technological progress and the improvement in efficiency. 

In this framework, technological progress shifts the production frontier upward for all states, while 

an improvement in technical efficiency moves each state towards the production frontier. There 

appears to be a large variation in the efficiency of production across U.S. states and the empirical 

work suggests that states with better human capital, higher spending on research and 

development, or a more developed financial system all tend to be more efficient and closer to the 

technological frontier.

Panel regressions of TFP growth across U.S. states over the last two decades seem to corroborate 

these findings, showing that higher educational attainment and greater spending on R&D 

(especially by the government) are linked to higher TFP growth.

1

See R. Cardarelli and L. Lusinyan, “U.S. Total Factor Productivity Slowdown: Evidence from the U.S. States,” Selected Issues 

Paper, 2014.

2

See J. Fernald, “Productivity and Potential Output Before, During, and After the Great Recession,” NBER 29th Annual Conference 

on Macroeconomics, 2014; R. Gordon,“ Is U.S. Economic Growth Over? Faltering Innovations Confronts the Six Headwinds,” NBER 

Working Paper 18315, 2012; M.N. Baily, J. Manyika, and S. Gupta, “U.S. Productivity Growth: An Optimistic Perspective, 

International Productivity Monitor 25, 2013. D.M. Byrne, S.D. Oliner, and D.E. Sichel, “Is the Information Technology Revolution 

Over?” International Productivity Monitor 25, 2013.

Deceleration in Average TFP Growth, 2005–2010 vs. 1996–2004

(percent change)

 Source: IMF staff estimates.
UNITED STATES

20 INTERNATIONAL MONETARY FUND

 Energy independence. Ongoing investments in the development of U.S. energy resources—

including those for shale oil and gas and renewables—as well as improvements in energy 

efficiency have allowed domestic crude oil production to surpass net imports for the first time 

since 1995. This should narrow the oil trade balance from -1.4 percent of GDP in 2013 to about 

3⁄4 percent of GDP by the end of the decade. The U.S. is also expected to become a net exporter 

of natural gas by 2018. Fully capitalizing on the benefits of increased energy independence in an 

environmentally responsible way will require removing remaining export restrictions on crude oil,

building infrastructure to transport and export gas (particularly LNG), as well as providing 

incentives for investment in, and use of, green energy technologies.3The recent rule proposed by 

the Environmental Protection Agency to cut emissions from existing fossil fuel-fired power plants 

by as much as 30 percent by 2030, compared with 2005 levels, would provide further incentives 

to upgrade plants, switch from coal to natural gas, improve energy efficiency, and promote 

renewable energy.

 Trade liberalization. Longer-term growth will also be helped by a further reduction of obstacles 

to free trade in goods and services. The U.S. is prioritizing reaching preferential trade 

agreements—including the Trans-Pacific Partnership and the Transatlantic Trade and Investment 

Partnership—as well as plurilateral agreements—such as the Trade in Services Agreement and 

the Information Technology Agreement. To avoid fragmenting the global trading system, 

progress in preferential trade agreements should be actively complemented by renewed efforts 

to advance the multilateral trade agenda. The U.S. should work with trade partners to finalize by 

end-2014 a work program to advance in the trade agenda at the WTO.

21. Fiscal implications. Clearly, many of the measures 

suggested above to boost long-run growth would have fiscal 

implications. In particular, passage of bills authorizing 

additional infrastructure spending, EITC enhancement,

increased funding for active labor market policies, and making 

the R&E tax credit permanent would add about 0.3 percent of 

GDP to the federal deficit over 2015–16. It should be noted 

that the fiscal costs would be partly offset by better growth

resulting from these policies. Such measures should, however,

be accompanied by higher revenues and offsetting 

expenditure savings in future years (see below).

22. Authorities’ views. The authorities agreed with many 

of the supply-side priorities highlighted by staff and indicated that the Administration continues to 

favor policies that raise long-term growth. They particularly highlighted their efforts to raise public 

spending on infrastructure, job training, research and innovation, preschool education, and to pass 

 

3

See B. Hunt, M. Sommer, G. Di Bella, M. Estrada, A. Matsumoto, and D. Muir, “Macroeconomic Implications of the 

U.S. Energy Boom,” in IMF Country Report No. 13/237.

0

0.1

0.2

0.3

0.4

0

0.1

0.2

0.3

0.4

2015 2016 2017-24 

(Average)

Infrastructure ($200 billion) R&E tax credit

EITC enhancement Job training 

Fiscal Policy Measures to Support Growth 

(change in primary deficit; percent of GDP)

Sources: CBO, JCT; IMF staff estimates.
UNITED STATES

INTERNATIONAL MONETARY FUND 21

pro-work tax cuts. If put in place today, the authorities believed that such policies would push 

growth up to an average 31⁄4 percent over the next three years and achieve a potential growth rate of 

21⁄4 percent over the medium-term. On energy policy, the authorities indicated they were taking an 

active look at the implications of growing domestic energy supplies including the economic, 

environmental, and security opportunities and challenges that it presents and would evaluate policy 

options as needed. 

PUTTING PUBLIC DEBT ON A DOWNWARD PATH

23. Medium-term adjustment. Past policy advice 

has emphasized the importance of a medium-term fiscal 

plan and early action to slow entitlement spending (see 

Annex III for a summary of past policy advice). It also 

made the case that less fiscal withdrawal in the short run, 

accompanied by a medium-term fiscal plan and 

ambitious structural reforms, would allow for a more 

balanced policy mix by partly relieving monetary policy 

of its burden of supporting the recovery. This, in turn, 

would generate more favorable outward spillovers while 

reducing the risks to U.S. and global financial stability 

from a prolonged period of low interest rates. 

Consolidation in 2011–13 was stronger than had been earlier anticipated (the federal primary 

structural deficit declined by 11⁄4 percent of GDP more than was predicted in 2011). However, the 

outlook for potential growth has worsened, lowering future federal revenues and compounding the 

long-term fiscal sustainability challenge. As a result, under current policies, after stabilizing in 2015–

18, the debt-to-GDP ratio is expected to begin rising again as aging-related pressures assert 

themselves and interest rates normalize. Staff estimates that, relative to current policies, an 

additional 23⁄4 percent of GDP in fiscal adjustment at the general government level would be needed 

between now and 2023 in order to put the debt-to-GDP ratio on a downward path over the medium 

term (even as age-related outlays for health and social security start to accelerate). 

24. A better policy mix. Given the substantial slack in the economy, there is a strong case to 

provide continued policy support to the recovery. A credible medium-term fiscal consolidation plan

would provide the flexibility for some near-term fiscal support to the economy that is designed with 

a focus toward reducing poverty and encouraging longer-term growth. Helping to kick-start growth 

and job creation in this way would have near-term demand effects but, more importantly, lasting 

implications for potential growth. It may also, at the margin, allow for an earlier withdrawal of 

exceptional monetary stimulus with some positive spillovers to both domestic and international 

financial stability. 

68

70

72

74

76

78

80

82

68

70

72

74

76

78

80

82

2012 2014 2016 2018 2020 2022 2024

President's 2015 Budget

IMF (current policies 1/)

Federal Debt Held by the Public 

(fiscal years, percent of GDP )

Sources: OMB; IMF staff estimates.

1/ See note in Table 3 for the differnce in policy assumptions compared to the 

Presiden'ts Budget.
UNITED STATES

22 INTERNATIONAL MONETARY FUND

25. Policies. In this vein, the President’s 2015 budget 

outlines various valuable steps that would move toward 

such a policy mix. It proposes health care savings (including 

through higher Medicare premia), immigration reform, and 

measures that limit tax deductions and exclusions for higher 

earners. There are also sensible options laid out in various 

proposals under consideration in Congress. Given the long 

gestation period of reforms, producing measurable savings 

over the medium term will require up-front action and will 

need to encompass:

 Controlling health care costs. Some progress has already been made in taming the fiscal 

pressures from rising health care costs and there has been a tangible slowdown in the growth of 

health spending, partly attributable to the implementation of the Affordable Care Act (ACA).

4

However, it is unclear to what extent this cost slowdown will persist and what are the fiscal and 

cost implications of the Medicaid expansion under the ACA. As a result, more could be needed. 

Measures that could be considered to bend the cost curve include the enhanced coordination of 

services to patients with chronic conditions, the education of patients to reduce the overuse of 

expensive medical procedures and technology, greater cost sharing with beneficiaries, and the 

elimination of tax breaks for some of the more generous employer-sponsored health care plans. 

 Strengthening social security finances. The 2013 Annual Report by the Social Security Trustees 

projects that the combined trust fund reserves would decline beginning in 2021 and reach zero 

by 2033, at which point continuing income would be sufficient to pay only 77 percent of benefits. 

The clock runs faster for the Disability Insurance Trust Fund, which would be exhausted as early 

as 2016. Addressing the expected depletion of the Social Security Trust Funds will require early 

and fundamental reforms. These could include a further gradual increase in the retirement age 

(potentially with steps that link the future retirement age to average life expectancy or other 

actuarial indicators of the solvency of the system), a modified benefit structure to increase 

progressivity, an increase in the maximum taxable earnings for Social Security purposes, and an 

indexation of benefit programs and tax provisions to chained CPI (rather than standard CPI).

 Improving the tax structure and raising revenues. In addition to the tax measures described earlier 

(to enhance long-term growth by making the direct tax system simpler, more equitable, and with 

less negative incentive effects), there is also a need to raise additional revenues so as to 

contribute to the needed medium-term fiscal adjustment. To do this, the U.S. could consider a 

 

4

See D. Igan, K. Kashiwase, and B. Shang, “Risky Business: The Uncertainty in U.S. Health Care Spending,” in IMF 

Country Report No. 13/237.

Cost cutting 

measures

VAT (5%)

Carbon tax

Corporate 

loopholes

-2.1

-1.6

-1.1

-0.6

-0.1

-2.1

-1.6

-1.1

-0.6

-0.1

Health care Social Security Tax system

Options for Federal Fiscal Deficit Reduction

(change in primary deficit in 2014-24, percent of GDP)

Sources: CBO, JCT; IMF staff estimates.

Individual tax 

deductions

Gas tax increase

Limit tax breaks for 

employer plans

Higher maximum 

taxable earnings

Chained CPI

Changes to benefit 

calculations and increase 

in retirement age
UNITED STATES

INTERNATIONAL MONETARY FUND 23

range of options, including a broad-based carbon tax, a higher federal gas tax, and a federallevel VAT.5

26. Authorities’ views. The authorities agreed that the benefits to the U.S. economy from a clear 

fiscal consolidation plan would be significant. They indicated this was exactly the approach that had 

been taken in the President’s 2015 Budget, which proposed a roadmap for accelerating economic 

growth, expanding opportunity for all Americans, and ensuring fiscal responsibility. Under their 

budget plan, the federal deficit would be lowered to 1.6 percent of GDP by 2024, bringing debt 

down to 69 percent of GDP. This would be achieved through improved efficiency savings as well as 

longer-term health, tax, and immigration reforms. They also agreed that a credible medium-term 

consolidation plan would give some space to provide more support to the recovery in the near term 

(particularly through investments in infrastructure, education, and other productivity-enhancing 

areas). However, they believed that, although it would be politically difficult to agree on a 

comprehensive medium-term fiscal plan, it could be possible to achieve bipartisan support to pass, 

by the end of the current administration, a reform of the business tax regime, increased funding for 

infrastructure and work training programs, and immigration reform. In this regard, the Bipartisan 

Budget Act of December 2013 could be a blueprint to replace automatic spending cuts in FY2016 

with mandatory savings in future years. On health care, officials believed that the full effects of the 

ACA had yet to be felt and they favored waiting on other health care reforms in order to allow the 

system time to adapt to the various provisions of the ACA.

27. The institutional framework. The three-week shutdown in October 2013 is estimated to 

have subtracted 0.3 percentage points (annualized) from fourth quarter growth with the uncertainties 

generating negative spillovers to various other countries. Fiscal policy uncertainty has been 

temporarily reduced, but many of the same features—linked to discussions on appropriations, 

negotiations on removing the sequester provisions for fiscal year 2016, and raising the debt ceiling—

could come back to the fore in spring 2015. A more durable, institutional solution to risks from 

political brinkmanship is needed both for the sake of the U.S. and the global economy. Useful 

measures could include reaching bipartisan agreement on a clear, simple medium-term fiscal 

objective (with an integrated view of all budget functions and numerical targets for the debt and 

deficit); adopting carefully-designed mechanisms to trigger revenue or spending adjustments if 

targets are breached; an automatic process that would raise the debt ceiling once there is agreement 

on the broad budget parameters; and shifting to a budget cycle where annual spending levels are 

agreed for a two-year period (but with the possibility for supplemental budget resolutions during 

that two-year window under clearly specified conditions). 

28. State and local finances. At the state level, higher levels of unfunded pension liabilities and 

political polarization appear to be associated with lower credit ratings.

6

To support their credit 

 

5

See IMF, 2010, “From Stimulus to Consolidation: Revenue and Expenditure Policies in Advanced and Emerging 

Economies,” for a broader discussion of tax policy options. 

6

See M. Estrada, D. Igan, D. Knight, “Fiscal Risks and Borrowing Costs in State and Local Governments,” Selected 

Issues Paper, 2014.
UNITED STATES

24 INTERNATIONAL MONETARY FUND

ratings and lessen financing costs, state and local governments should adopt budget institutions that 

reduce the impact of these factors, including less stringent voting requirements to implement 

revenue increases and more flexible rainy-day fund rules. Steps could also be taken to require states 

to measure their unfunded liabilities under more realistic actuarial assumptions and to restore 

actuarial soundness for public sector employee pension and other post-employment benefit 

programs.

29. IMF quota reform. The implementation of the 2010 reforms remains a high priority and the 

U.S. was urged to ratify these reforms at the earliest opportunity. 

30. Authorities’ views. Counterparts were supportive of the importance of budget process 

reform, including through a more sensible approach to the debt ceiling, although they expressed 

skepticism on whether any of these changes would be achievable in the near term. On IMF quota 

reform, the authorities reiterated their belief that IMF quotas must truly reflect countries’ weight in 

the global economy and indicated that they were actively working with Congress to secure 

legislation to implement the 2010 IMF quota reforms.

THE PATH TO LIFT-OFF

31. Monetary policy. The Fed currently has to contend with multiple areas of uncertainty 

including the degree of slack in the economy, the degree to which this slack will translate into future 

wage and price inflation, and the transmission to the real 

economy of an increase in policy rates. Currently, the 

median forecast of participants in Federal Open Market 

Committee (FOMC) deliberations indicates that the fed 

funds rate is expected to lift-off from zero by mid-2015, 

with a gradual path upward toward a 3.75 percent longterm level. Staff’s baseline path is somewhat more gradual 

than this median. However, even with this path for policy 

rates, the economy is expected to reach full employment 

slowly and inflation pressures are forecast to remain 

muted. This could mean that—presuming systemic 

financial stability risks are contained—there is some scope 

for policy rates to stay at zero for longer while still keeping inflation under 2 percent. On the other 

hand, inflation could start rising faster than expected. This would place increasing tension between 

the Fed’s mandates of maximum employment and price stability. In that case, if expectations 

remained anchored and financial stability risks were low, there could be room for the Fed to tolerate 

a temporary and modest rise of inflation above the 2 percent target. Much will depend on the source 

of the higher inflation. If the increase were transitory or not accompanied by rising wages, there 

could well be more space to defer rate increases. However, if this inflation were driven by an 

unexpected upswing in wages, then there would be a need to carefully reconsider whether preferred 

measures of slack were still appropriate, reassess if the economy was actually much nearer to full 

employment than it currently appears, and potentially begin raising rates at an earlier stage. 

0

1

2

3

4

5

0

1

2

3

4

5

2014 2015 2016 2017 2018 2019

FOMC Summary of 

Economic Projections 2/ 

(median)

Expectations for Future Policy Rates

(percent)

Sources: FederalReserve Board, Federal ReserveBank of New York; IMF staff 

estimates.

1/ April 2014. 

2/ June 2014. 

Primary Dealers Survey 1/ 

(25-75 percentile)

IMF staff 

projections
UNITED STATES

INTERNATIONAL MONETARY FUND 25

32. Global spillovers. The impending increases in U.S. interest rates will have important 

consequences for the global economy. The 2014 Spillover Report highlights that if these increases 

come at a time of higher U.S. equity prices and a better U.S. growth outlook, they should generally 

be a positive factor for other countries. However, there could still be pockets of stress in some of the 

more vulnerable economies. In contrast, an increase in the long rate that is not accompanied by a 

U.S. growth improvement (for example, a shift in Fed policy driven by concerns about a pickup in 

inflation) will have an unambiguously negative outward spillover effect, especially for those emerging 

markets (EMs) and advanced economies with already-weak fundamentals (as was seen in 2013). The 

latter scenario would likely mean higher sovereign and corporate spreads, a slowdown or reversal of

capital flows, lower asset prices, and a drag on EM growth. Model estimates indicate that the 

second-round effects—i.e., the multiplier effect of a movement in U.S. rates, spilling out to emerging 

markets and other advanced economies, and then feeding back into U.S. growth and inflation—are

likely to be empirically modest. Of course, there could be larger feedback effects that are not easily 

captured by such models (for example, in a tail event where U.S. policy action triggers crises in 

several of the vulnerable countries) but any estimate of their possible size would be necessarily 

speculative.

33. Authorities’ views. The authorities indicated that monetary policy would adapt to changing 

economic circumstances, as it always has, and would be focused on achieving the Fed’s mandate of 

maximum employment and price stability. The authorities believed the recent increase in core PCE 

inflation mainly reflected transitory or seasonal factors and emphasized that inflation is unlikely to 

return to 2 percent until wage growth moves above labor productivity growth. In the event inflation 

were to rise close to their longer-term goal but the economy appeared to remain well below full 

employment, they would have to carefully re-examine their assessment of the degree of slack left in 

the economy. The authorities also said that, while they would not try intentionally to overshoot that 

target, if inflation were to rise above 2 percent the pace at which they would try to subsequently 

disinflate would depend very much on how much progress had been made in achieving their 

employment mandate. The authorities recognized the international implications of U.S. monetary 

policy and pointed out that Fed staff had undertaken significant analysis to better understand the 

size and nature of outward spillovers from policy actions. They also indicated they would not 

discount the potential risks of second-round effects, but highlighted the uncertainty surrounding the 

size of both spillovers and subsequent “spillbacks”.

34. Communication. The Fed has made important and substantive efforts to increase 

transparency and has adopted an adaptable approach to communication. So far, the Fed’s forward 

guidance has generally been effective in managing expectations and reducing uncertainty about 

future policy rates (Box 5). The return to qualitative forward guidance in March provides the Fed with 

greater flexibility but, at the same time, puts an even higher premium on clear and systematic 

communication to guide expectations, particularly given the potential adverse effects of 

miscommunication for international financial markets. Enhancing the Fed’s communications toolkit 

would be a natural evolution that could help temper the likelihood of market volatility or abrupt 

asset price corrections along the exit path. Specifically, consideration could be given to:
UNITED STATES

26 INTERNATIONAL MONETARY FUND

 Scheduling press conferences by the Fed Chair after each FOMC meeting to provide a more 

frequent, structured environment to explain the committee’s evolving thinking.

 Publishing a quarterly monetary policy report, that is endorsed by the FOMC and which conveys 

more detail about the majority view of the FOMC on the outlook, policies, and the nature of 

uncertainties around the baseline. Such a report may also convey dissenting views within the 

FOMC as well as broader information on how the FOMC thinks about policy reactions in 

plausible, non-baseline scenarios. This would complement the “dots” (i.e., the individual FOMC 

member’s quantitative assessment of future macroeconomic variables and policy interest rates) 

and provide a more systematic way for the Fed to convey the majority FOMC view.

 Providing greater clarity from the FOMC on how it views current conditions for financial stability,

how such considerations figure into its monetary policy decisions—both about the balance sheet 

and policy interest rates—and how these relate to its current mandate. This would allow the Fed 

to convey to markets how its monetary policy may be affected by its assessment of a decline in 

realized and expected volatility, a build-up in leverage, credit risks, unsustainable declines in term 

premia, or other financial stability concerns.

35. Authorities’ views. The authorities indicated that attempts had been made in the past to 

agree on some form of monetary policy report but, in the end, it had proved very difficult to reach 

agreement among the FOMC members on the structure of such a report and on a set of forecasts or 

scenarios that the FOMC could somehow endorse. They would, however, continue to examine the 

possibilities of such a product and emphasized the inappropriateness of viewing the median of the 

summary of economic projections as a representation of the aggregate views of the FOMC. At 

present, quarterly press conferences coincide with the publication of the summary of economic 

projections and the authorities felt that tangible benefits from more frequent press conferences were 

unclear at this stage. In terms of taking account of financial stability concerns, the authorities 

indicated that this was a complex task because there is no solid analytical structure, as yet, to frame 

such issues in the context of monetary policy. Nevertheless, the FOMC was highly attuned to 

financial developments, and their assessment of progress toward maximum employment and price 

stability certainly took due account of readings on financial developments. 

36. Operational issues. Barring unforeseen developments, the current pace of tapering should 

be maintained, implying an end to asset purchases in late 2014. Normalization of the Fed’s balance 

sheet over the medium term should occur by letting asset holdings mature (in line with the June 

2011 “exit principles” and subsequent communications). It would be useful, however, for the Fed to 

provide greater clarity at an early stage, through a formal update of its exit principles. The 

effectiveness of the fed funds target as the signal for monetary policy may pose a challenge for the 

operational framework once rates begin to rise. Although the fed funds market is unlikely to operate

as it did before the financial crisis, there are arguments for retaining the fed funds target, for now, 

while maintaining flexibility to respond to market reactions during exit. The use of the overnight 

reverse repo and interest on excess reserves should allow the Fed to set a solid floor on market rates, 

and this could be complemented with term instruments to absorb excess liquidity. The recent 

expansion in Fed counterparties for the overnight reverse repo potentially creates arbitrage
UNITED STATES

INTERNATIONAL MONETARY FUND 27

Box 5. The Impact of Fed’s Forward Guidance1

The Fed has used forward guidance since December 2008 to communicate its intention to keep the 

policy interest rate low, providing added stimulus to the economy and reducing uncertainty about 

future policy. Several studies find that interest rate expectations shifted at Fed announcements, 

consistent with a financial market re-evaluation of the Fed’s policy reaction function.2 There is also 

evidence that forward guidance has reduced the sensitivity of interest rates to macro news.

3 However, 

less attention has been paid to the impact of forward guidance on uncertainty.

Date-based forward guidance (i.e., where the Fed specified the likely date of future rate increases) was

successful in moving the date at which rates 

were expected to increase further into the future. 

This helped reduce policy uncertainty. There was, 

however, little discernible impact on expected 

interest rates following the shift to state-based

forward guidance (i.e., where the Fed specified 

unemployment and inflation thresholds that 

would need to be reached before rates begin to 

rise). Most recently, the return to qualitative

forward guidance coincided with some upward 

shift in policy rate expectations.

After controlling for economic uncertainty (as 

measured by the dispersion in analysts’

unemployment and inflation forecasts) and 

other factors (including broader market 

uncertainty and risk aversion as proxied by the 

VIX index), forward guidance appears to have 

been associated with reduced uncertainty 

about future interest rates (as measured by the 

implied volatility on swaption contracts). This 

effect was larger under date-based forward 

guidance but state-based forward guidance 

also helped reduce uncertainty (even despite

the spike in volatility in mid-2013). Finally, the 

recent return to qualitative forward guidance has also been associated with lower uncertainty.

1

See T. Mahedy, J. Turunen, and N. Westelius, “Monetary Policy Communication and Forward Guidance,” Selected Issues 

Paper, 2014.

2 See K. Femia, S. Friedman, and B. Sack, “The Effects of Policy Guidance on Perceptions of the Fed’s Reaction Function,” Federal 

Reserve Bank of New York, 2013; and M.D. Raskin, “The Effects of the Federal Reserve’s Date-Based Forward Guidance,” Finance 

and Economics Discussion Series, Federal Reserve Board, 2013.

3

See E. Swanson and J. Williams, “Measuring the Effect of the Zero Lower Bound on Medium and Longer Term Interest Rates,” 

Federal Reserve Bank of San Francisco, 2013.

15

35

55

75

95

115

135

155

175

195

12/16/2008 12/16/2009 12/16/2010 12/16/2011 12/16/2012 12/16/2013

Swaptions, Implied Volatilities

(Vols)

Average over forward guidance period

Date based

guidance

State based

guidance

Qualitative

guidance

Sources: Bloomberg and staff estimates.

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

Qualitative 

Guidance I

Date Based 

Guidance

State Based 

Guidance

Qualitative 

Guidance II

Interest Rate Impact on Forward Guidance 

Announcement Days 1/

(D/D change in the expected rate, percent)

12 Months

24 Months

30 Months

1/ Changes in the implied interest rate of Eurodollar options.

Sources: Bloomberg and staff estimates.
UNITED STATES

28 INTERNATIONAL MONETARY FUND

0

4

8

12

16

0

4

8

12

16

Tier 1 common capital

Non-common tier 1 capital

TARP

Tier 1 Common Capital Ratios at CCAR Institutions

(percent of risk-weighted assets)

Source: SNL Financial. 

-5

0

5

10

15

20

-5

0

5

10

15

20

Jan.86 Jan.90 Jan.94 Jan.98 Jan.02 Jan.06 Jan.10 Jan.14

Return on Equity for U.S. Banks

(percent)

Sources: FRED Database and Federal Reserve.

opportunities by encouraging resources to migrate from banks—that are subject to more rigorous 

regulations and deposit insurance fees—to money market funds that now have access to Fed 

instruments. However, these risks could be managed through the setting of rates (on the overnight 

reverse repo) and caps on either an aggregate or per counterparty basis.

7

37. Authorities’ views. The authorities noted that the FOMC continues to evaluate the 

appropriate future operational framework for normalizing the stance of monetary policy in the 

context of the Fed’s large balance sheet, including the appropriate role of the fed funds target in 

communications regarding monetary policy during normalization. They argued that the fed funds 

rate currently moves in line with other short term rates and that any reduction of its role would need 

to be carefully communicated well in advance of its implementation. A new money market survey is 

likely to help the Fed in better understanding different segments of the money market. The Fed 

could also employ a variety of other short-term rates (such as the interest on excess reserves and the 

overnight reverse repo rate) in its policy communications during exit. 

SECURING A SAFER FINANCIAL SYSTEM

38. Progress in the banking sector. The largest U.S. 

banks have continued to boost their capital positions: Tier 1 

common equity ratio rose to 11.6 percent at end-2013 and 

the recent Fed stress tests showed the 30 largest U.S. banks 

are resilient to a severe deterioration of domestic 

macroeconomic conditions. Further, the majority of the 

large U.S. banks will add capital over the next two years. 

Nevertheless, in the latest Comprehensive Capital Analysis 

and Review (CCAR) stress tests, capital plans were rejected 

for five banks (including three foreign-owned bank holding 

companies), of which four were rejected based on qualitative 

concerns about their internal controls.

39. Potential pressure points. The results from the 

stress tests showed that, if hit by a severe global market 

shock, the larger U.S. banks would face a significant decline 

in their capital ratios and sizable losses from trading

activities. For investment banks, a non-trivial dependence on 

wholesale funding continues to be a source of vulnerability 

in periods of severe financial market distress. Recent 

regulatory changes aimed at addressing these vulnerabilities 

have lowered systemic risks but, in doing so, may weigh on 

 

7

See S. Gray and D. King, “The Operational Framework for Monetary Policy,” Selected Issues Paper, 2014.
UNITED STATES

INTERNATIONAL MONETARY FUND 29

banks’ future profitability with the current return on equity well below pre-crisis averages. There is a 

risk, therefore, that banks will try to restore their profitability through looser lending standards or a 

lengthening of the duration of assets, boosting returns at the cost of larger asset-liability 

mismatches. Avoiding such an outcome and preventing such incentives from creating new financial 

risks will necessitate an intensive approach to bank supervision.

40. Insurance. While difficult to assess, there may well be 

risks building in the insurance sector, driven by a search for 

yield in a prolonged low interest rate environment. Indeed, 

investment returns had been steadily falling, narrowing the 

gap with the required return on the portfolio. Also, concerns 

about the ceding of liabilities to affiliated and less-regulated 

off-balance sheet reinsurance vehicles have emerged. The 

oversight of the insurance sector is fragmented between 

state and federal entities, and there is a need for a better 

consolidated picture of insurance companies’ global activities 

and risks. At the same time, the lack of timely and publiclyavailable, consolidated data on insurance companies, 

including their offshore activities, complicates the monitoring 

of credit and liquidity risks. Such risks should be assessed and publicized through a coordinated, 

nationally consistent approach to supervision and stress testing. As part of that effort, the Federal 

Insurance Office should have a significantly larger role in the regulatory framework and be resourced 

accordingly.

41. Mortgage availability. A tighter regulatory 

regime for mortgage lending has helped better match the 

costs of such financing with the underlying risks. However, 

as a consequence, the recovery in the U.S. housing market 

has been held back by a continued conservative approach 

to mortgage lending, particularly to lower-rated 

borrowers. This has been driven by a range of factors that 

include persistent anxiety about potential “put-back” risks 

(i.e., where Fannie Mae or Freddie Mac require mortgage 

originators to repurchase loans because of discrepancies 

in underwriting or documentation); litigation and 

reputational risks to lenders; a tighter regulatory 

environment and supervisory scrutiny; and uncertainty about the future structure of the mortgage 

industry. Some steps have been taken, including by establishing a safe harbor for Qualified 

Mortgages that meet a clear set of minimum standards and by clarifying the conditions for putbacks. There is scope to do more to lessen uncertainties facing lenders, without undermining 

regulatory and supervisory scrutiny. In particular, efforts could be made to improve information 

sharing during the mortgage origination process and to clarify further the scope of exemptions in 

“sunset” clauses (i.e., provisions that release lenders from their liability under certain circumstances). 

4

5

6

4

5

6

2006 2007 2008 2009 2010 2011 2012 2013

Investment yield

Required interest rate

Life Insurance: Net Yield on Invested Assets

(percent)

Source: SNL Financial.

620

660

700

740

780

620

660

700

740

780

2000 2002 2004 2006 2008 2010 2012 2014

Average FICO Scores across Loan Types

Conventional 

FHA

All

Source: CoreLogic.
UNITED STATES

30 INTERNATIONAL MONETARY FUND

42. Housing finance. The federal government continues to play an unprecedented role in this 

market, guaranteeing nearly 80 percent of newly originated loans. Going forward, there is a need for 

a more clearly-defined and transparent government participation in the housing finance market with 

a clear delineation—and transparent fiscal accounting—of public interventions designed to promote 

social goals linked to housing. In the end, the system should have:

 A substantial first-loss risk borne by private capital (rather than taxpayers); 

 An explicit public backstop that is limited to catastrophic credit losses with risk-based guarantee 

fees; 

 A role for regulatory agencies in setting underwriting standards; and

 A common platform for securitization.

The transition to such a system should be carefully phased so as to avoid undermining the ongoing 

recovery of the housing market and the tentative restart in the private securitization market. It is also 

essential that along this transition path appropriate underwriting standards and supervision are kept 

in place to discourage a future cycle of overinvestment and unsustainable leverage in the housing 

market. 

43. Corporate credit market risks. Ample liquidity and low rates have encouraged companies

(which already have significant liquid assets) to refinance, extend maturities, and push rollover risks 

out into the future (Figure 3). At the same time, though, underwriting standards have been weakened 

in some areas, particularly linked to lending to corporations with weaker credit fundamentals. 

Indications of such risks include: 

 Gross issuance of high yield bonds and loans in 2011–13 is more than double that in 

2005–07;

 The share of bonds being issued with non-cash coupons or CCC ratings, and of loans that are 

covenant-lite or with second-liens, is rising; 

 Debt-to-earning levels for corporations taking on highly leveraged loans are increasing.

Lower credit costs and longer maturities should lessen the likelihood of corporate stress. However, as 

the credit cycle matures, increased exposure to more risky borrowers and the aggregate rise in 

leverage in the nonfinancial corporate sector could contribute to a rising rate of default and lower 

recoveries on defaulted debt. 
UNITED STATES

INTERNATIONAL MONETARY FUND 31

Figure 3. Credit Market Risks

While high-yield bond issuance has picked up over the last 

two years, their share of total issuance remains stable.

Leveraged loans and covenant-lite loans have also grown 

although the latter represents a relatively small share of 

the overall loan market.

Proceeds from such borrowing have been used mainly to 

refinance higher cost financing... ....and total corporate investment remains depressed.

Firms have plenty of cash and have extended their debt 

maturity.

Aggregate leverage has risen but the debt burden is lower 

than pre-crisis.

Sources: Bloomberg L.P., Census Bureau, Federal Reserve Board, Haver Analytics, Thomson-Reuters, SNL Financial, World Scope; 

IMF staff estimates.

40

140

240

340

5 

10 

15 

20 

25 

1998 2000 2002 2004 2006 2008 2010 2012 2014

High yield bonds/corp. bonds (LHS)

High yield issuance (billions ,RHS)

High Yield Bonds

(percent)

0

5

10

15

20

25

30

0

5

10

15

20

25

30

1997 1999 2001 2003 2005 2007 2009 2011 2013

Leveraged loans/total loans

Covenant-lite/total loans

Leveraged and Covenant-Lite Loans

(percent)

0

20

40

60

80

100

0

20

40

60

80

100

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Acquisitions/LBOs Capex Project financing Equity monetization Refi

Proceeds from Leveraged Loans 

(percent)

30

35

40

45

50

55

60

64

68

72

76

80

84

2006 2007 2008 2009 2010 2011 2012 2013 2014

Long-term debt/credit market debt (LHS)

Liquid assets/short-term liabilities (RHS)

Nonfinancial Corporate Sector

(percent)

. -30

-20

-10

0

10

35 20

40

45

50

55

60

1990 1993 1996 1999 2002 2005 2008 2011 2014

Nonfinancial Corporate Sector

(percent)

Debt-to-net worth

Debt-to-assets Interest coverage ratio (RHS, 

inverted scale)

0

1

2

3

4

5

0

1

2

3

4

5

1967 1972 1977 1982 1987 1992 1997 2002 2007 2012

Average, 

1967-2012

Net Private Non-Residential Fixed Investment

(percent of GDP)
UNITED STATES

32 INTERNATIONAL MONETARY FUND

44. Nonbank intermediary risks. Intermediation 

taking place outside of the banking system is growing, 

creating a range of potential risks, all of which were 

highlighted in the 2014 Financial Stability Oversight 

Council (FSOC) Annual Report and include:

 The growing amount of maturity and liquidity 

transformation that is taking place through mutual 

funds or exchange-traded funds (ETFs), particularly 

those investing in credit instruments; 

 The volume of nonbank flows being directed to 

higher credit risk and longer duration assets; 

 The uncertain leverage and risks that are embedded in securities lending undertaken by large 

financial institutions;

 A decline in broker-dealer involvement in market making activity, potentially hampering the 

functioning of markets and price discovery at times of market stress.

45. Implications. Despite these pockets of 

vulnerability, overall financial stability risks appear to have 

marginally declined over the past year. However, when set 

against a backdrop of an upcoming rise in short-term 

interest rates or the potential for an abrupt unwinding of 

currently compressed market pricing of volatility and risk 

and term premia, there is a possibility that these 

vulnerabilities could manifest themselves in a disruptive

way. For example, a tail risk involving a precipitous 

attempt by investors to exit certain markets—perhaps 

exacerbated by outflows from exchange traded funds 

(ETFs) and mutual funds as well as near-term illiquidity in 

market functioning—could trigger a sudden, self-reinforcing re-pricing of a range of financial assets. 

While the banking system would be robust to such a set of events, it could have more dramatic 

implications for the nonbanks which, in turn, would hurt U.S. growth—through wealth effects from 

lower asset prices, difficulties in rolling over or accessing new financing, and strains in the corporate 

sector—as well as have negative knock-on effects internationally.

46. Regulatory responses. Good progress has been achieved in implementing the Dodd-Frank 

Act and moving ahead the financial regulatory agenda including through the finalization of the 

Volcker rule, the designation of another systemically important financial institution, implementing 

the over the counter (OTC) derivative reform, and putting in place liquidity and leverage 

requirements that appear to be compatible with Basel III standards (an ongoing Regulatory 

0

4

8

12

16

0

4

8

12

16

1991 1997 2003 2009

Exchange-traded Funds

Closed-end funds

Money market mutual funds

Mutual funds

Assets of the Investment Industry

(trillion dollars)

Source: Federal Reserve Board.

0

2

4

6

8

10

Inward spillover risks

Credit risks

Market and liquidity 

risks

Risk appetite

Monetary and 

financial conditions

Macroeconomic risks

2014Q2

2013Q2

Source: IMF staff estimates.

Note: Away from center signifies higher risks, easier monetary and 

financial conditions, or higher risk appetite.

Financial Stability Map
UNITED STATES

INTERNATIONAL MONETARY FUND 33

Consistency Assessment Program will help provide a more definitive assessment). In addition, the 

U.S. recently put in place a rule to require foreign bank organizations (FBOs) over a certain size to 

incorporate as holding companies, a move that aligns the treatment of foreign and U.S. banks that 

are operating in the U.S. and eliminates an existing regulatory distortion (Box 6). To tackle the 

emerging pockets of risky behavior, there is scope for supervisors to tighten underwriting standards 

for more risky commercial lending, to attach higher risk weights or tighter limits on large exposures 

for particular assets (such as leveraged loans or high yield bonds), to strengthen prudential norms for 

holdings of securitized loans such as collateralized loan obligations (CLOs) by regulated entities, and 

to put additional capital charges on insurance companies. In addition, specific steps could be taken 

linked to:

 Money market mutual funds. Floating net asset value rules for prime money market mutual funds 

would be particularly useful in mitigating the risk of runs and should be introduced for those 

funds which invest in government securities. Other alternatives could include imposing stricter 

liquidity requirements or investment restrictions. These options are being considered by the SEC 

and will possibly result in a new rule for such funds.

 Tri-party repo markets. Stricter haircuts and margins would limit the risk of a pre-default sale of 

repo collateral (although the U.S. already imposes higher haircuts than the minimum defined by 

the Financial Stability Board). In addition, it will be important to press ahead in developing 

mechanisms to help counter the risk of ‘fire sale’ dynamics in the tri-party repo market.

 Too important to fail. The U.S. should continue to build on the Dodd-Frank Act provisions that 

allow for an orderly resolution of systemically important financial institutions. The remaining 

rules needed to fully implement the orderly liquidation authority for systemic nonbanks should 

be finalized. The resolution and recovery plans (submitted annually by the large banks) should be 

thoroughly assessed against severe contingencies that involve a large cross-border component. 

Progress is also needed in developing cooperative arrangements with regulators in other 

jurisdictions to manage the resolution of institutions with a significant cross-border presence, 

building on joint crisis planning exercises and in line with the principles of the Key Attributes of 

Effective Resolution Regimes. There is also a case for other large, interconnected, and complex 

financial institutions to be formally designated as systemically important in the insurance and 

asset management sectors. 

 Strengthening the macro-prudential framework. Given the complexity of the U.S. regulatory 

structure, there are potentially large gains in establishing a smoother sharing of data and analysis 

among regulatory agencies and the Office of Financial Research. The macro-prudential 

framework could also be made more responsive to the build-up of systemic risk by clarifying 

how financial stability monitoring by the Office of Financial Research translates into FSOC 

recommendations and by instituting a timely and structured process for the various regulatory 

agencies to respond to FSOC recommendations. 
UNITED STATES

34 INTERNATIONAL MONETARY FUND

Box 6. The Foreign Bank Organizations (FBO) Rule

By July 1, 2016 FBOs with more than $50 billion assets in U.S. bank and nonbank subsidiaries 

will be required to reorganize their U.S. operations under an intermediate holding company 

(IHC). The resulting IHC will become subject to a 3 percent Tier 1 leverage ratio and similar 

prudential standards on liquidity as U.S. Bank Holding Companies (BHCs). FBOs with assets 

between $10–50 billion will be subject to enhanced prudential standards. 

Currently, FBOs play a significant role in the U.S. financial system accounting for 15 percent of 

the total U.S. banking assets, approximately 40 percent of the reserves held at the Fed, around 

one-half of the U.S. corporate bond issuance, and one-third of equity trading. Of the 22 

primary dealers for the Federal Reserve, 15 are FBOs.

Requiring FBOs to hold more capital and liquidity in the IHCs improves the resilience of the 

U.S. financial system and aligns FBO governance to U.S. BHC standards. The FBO rule appears 

to be consistent with Basel III standards and moves the U.S. closer to the capital and liquidity 

standards applied to investment banking subsidiaries of foreign banks in other jurisdictions 

(notably the Euro Area, where investment banking subsidiaries are subject to Basel capital 

requirements, and the U.K., where additional local liquidity requirements are applied to 

banking subsidiaries of non-U.K. banks). 

By requiring IHCs to be separately capitalized within the U.S., the rule may reduce bank 

profitability at the parent level and induce organizational changes. The impact on U.S. bank 

credit will likely be minor (loans and portfolio holdings of FBOs account for less than 

10 percent of lending). The effect on U.S. capital markets could be larger. FBO broker-dealer 

subsidiaries current have an estimated aggregate tier 1 leverage ratio of 1.6 percent and the 

higher leverage ratio requirement may cause some of these types of FBOs to scale down their 

U.S. operations rather than raise equity, perhaps moving some balance-sheet-intensive 

operations to other jurisdictions. This could mean lower liquidity in the U.S. equity and bond 

markets and higher transaction costs. Moreover, repo transactions will start to count towards 

total leverage on a gross basis (rather than net as the current rules prescribe) which could 

make some repo lending by FBOs uneconomic 

(particularly low margin, balance-sheet-intensive 

repos of Treasuries and Agency MBS).

Using the limited publicly available data on noncommercial bank subsidiaries as of year-end 2013, it 

appears that of the 14 FBOs that are likely to be 

required to form IHCs, 4 currently fail to meet the 3 

percent Tier 1 leverage ratio. Assuming zero retained 

earnings or asset sales between now and July 1, 

2016, the total capital shortfall to meet the Tier 1 

leverage ratio would be about $17.4 billion (although 

this estimate is tentative given the lack of public data 

on the nature of FBO operations in the U.S.). 

0

2

4

6

8

10

0

2

4

6

8

10

Spanish 

banks

Canadian 

banks

Japanese 

banks

UK banks French 

banks

German 

banks

Swiss 

banks

Aggregated Capitalization for IHCs by Nationality

(percent, tier 1 leverage ratio)

Source: SNL Financial. 

Tier 1 leverage ratio 

requirement
UNITED STATES

INTERNATIONAL MONETARY FUND 35

47. Global spillovers. Recent regulatory changes in the U.S.—including the Volcker rule and 

rules on FBOs—will lower financial stability risks and reduce the associated risks of negative 

spillovers from the U.S. In doing so, though, these changes may increase the capital costs of the 

market making and trading activities of foreign banks operating in the U.S. There is little evidence, at 

this stage, to conclude that the range of regulatory changes undertaken by the U.S. are adding to 

financial fragmentation or are balkanizing the global financial system. Such potential spillovers will, 

however, be a topic that will be examined further in the context of the upcoming Financial Stability 

Assessment Program (FSAP). 

48. Financial integrity. Initiatives are underway to strengthen financial institutions’ 

requirements to identify and verify beneficial owners and to access information about beneficial 

ownership and control of U.S. corporations. These initiatives aim to prevent the abuse of legal 

persons and arrangements for financial crimes and to address deficiencies identified in the last 

Financial Action Task Force (FATF) mutual evaluation report of June 2006. However, these initiatives 

may only be implemented after 2015 and would imply an only modest improvement in the 

transparency of U.S. corporations and trusts. It will remain difficult, in particular, to pursue either the 

laundering of proceeds of foreign tax crimes taking place inside the U.S. or the use of U.S. 

corporations to commit tax crimes abroad.

49. Authorities’ views. Substantial progress has been made in the regulatory framework, in

increasing capital and liquidity buffers, and reducing leverage in the financial system. The authorities 

also felt that the FSOC process was working well. Low interest rates could create potential financial 

stability risks but, at this stage, these appear not to be systemic and are limited to pockets of 

vulnerabilities. Nevertheless, low levels of market pricing of volatility were of concern. Officials 

underscored that interest and funding risks are being closely watched as are other areas including 

embedded risks in securities lending and the repo market. The authorities expected the Securities 

Exchange Commission (SEC) to soon issue rules to tackle risks in the money market mutual funds. 

The authorities indicated that work is under way to better understand risks in the asset management 

industry and to modernize the regulatory framework for the insurance sector. Officials noted that the

U.S. is committed to adhering to its commitments under the G20 financial reform agenda and is 

encouraging other jurisdictions to do so also. This has included taking leadership in international

derivatives regulation and building on international agreements on leverage ratios for banks. The 

authorities indicated that they are actively pursuing ways to make access to mortgages for 

creditworthy borrowers easier but, without passage of legislation, it would be difficult to fully resolve 

uncertainties on the future of the housing finance system. Finally, the authorities looked forward to 

the upcoming FSAP as a means to engage in a full assessment of the financial system and the U.S. 

approach to regulatory reform as well as to discuss the many changes made to the U.S. financial 

system since the 2010 FSAP.
UNITED STATES

36 INTERNATIONAL MONETARY FUND

STAFF APPRAISAL

50. Growth. Recent data suggest a meaningful rebound in activity is now underway. This 

renewed dynamism will provide only a partial offset to the weak first quarter and GDP is projected to 

expand at 1.7 percent for 2014 as a whole. Barring unforeseen shocks, growth is expected to well 

exceed potential for the foreseeable future and, on an annual basis, should rise to 3 percent in 2015.

51. Jobs. Employment growth has been healthy but labor markets are weaker than is implied by 

the headline unemployment number. Long-term unemployment and the rate of involuntary parttime work are high, labor force participation is well below what can be explained by demographic 

factors, and wages are stagnant. With better growth prospects, the U.S. should see steady progress 

in job creation but headline unemployment is expected to decline only slowly—in part because 

improving prospects will draw discouraged workers back into the labor force—and long-term 

unemployment will take time to fall back to historic levels. 

52. Poverty. Reducing poverty will require, first and foremost, a much more robust return to 

growth and job creation. However, other policies have a role to play. The recent expansion of 

Medicaid and the increase in health insurance coverage under the ACA have been concrete steps 

whose effect on poverty and health outcomes should become more evident over time. An expansion 

of the EITC (including making permanent the various extensions that are due to expire in 2017) 

would also raise living standards for the very poor. Finally, given its current low level, the minimum 

wage should be increased. This would help raise incomes for millions of working poor and would 

have strong complementarities with the suggested improvements in the EITC, working in tandem to 

ensure a meaningful increase in after-tax earnings for the nation’s poorest households.

53. Productivity and labor supply. To offset the expected slowdown in potential growth 

immediate steps should be taken to raise productivity, encourage innovation, augment human and 

physical capital, and increase labor force participation. Such measures should involve investments in 

infrastructure and education, improving the tax system, active labor market policies, a broad, skillsbased approach to immigration reform, and efforts to fully capitalize on the gains from rising U.S. 

energy independence. No single measure will be sufficient and a manifold solution will certainly be 

required. There is no shortage of good ideas currently under public debate and so the challenge 

ahead will be to forge political agreement on specific legislation.

54. External assessment. Assessed imbalances and fiscal policy gaps in the U.S. have improved 

considerably over the past few years, creating significant positive spillovers to the global economy. 

The move toward increased energy independence will have a further positive effect on the U.S. 

external accounts. The U.S. external position appears broadly consistent with medium-term 

fundamentals and desirable policies.

55. Fiscal policy. The recent experience of debt ceiling brinkmanship and the government shut 

down once again illustrates the difficulty of finding political common ground on fiscal policy and the 

negative consequences—for both the U.S. and global economy—from political discord linked to 
UNITED STATES

INTERNATIONAL MONETARY FUND 37

fiscal policies. The Bipartisan Budget Act, enacted in December 2013, and the subsequent raising of 

the debt ceiling were important steps to address fiscal risks and improve both the pace and 

distribution of near-term deficit reduction. Going forward, even in the absence of a fully articulated 

medium-term consolidation plan, there is room to build on this progress through the identification 

of targeted areas to expand the near-term budget envelope, funded by offsetting savings in future 

years. Specific near-term measures that should be supported—many of which were in the 

Administration’s budget proposal—include front-loaded infrastructure spending, a better tax system, 

active labor market policies, and improving educational spending. Beyond this, further steps will be 

needed to put the general government debt on a sustainable longer-term path. This will require

reaching political agreement on a credible and detailed medium-term fiscal consolidation path that 

includes measures to lower health care spending, restore solvency to the social security system, 

reform the tax system, and raise revenues. Finally, while not a panacea, changes to budget 

procedures—including switching to a two-year budget cycle—could have a lasting effect in lessening 

fiscal policy uncertainty.

56. Monetary policy. The economy is expected to reach full employment only by end-2017 and 

inflationary pressures are expected to remain muted. If true, policy rates could afford to stay at zero 

for longer than the mid-2015 date currently foreseen by markets. Policy would, however, have to 

remain cognizant of burgeoning financial stability risks, particularly those that are inherently difficult 

to contain through available regulatory and supervisory tools. If inflation were to rise more rapidly 

than expected and the economy was still well below full employment, tolerating a modest, 

temporary rise of inflation above the longer-term goal could be consistent with the Fed’s balanced 

approach as long as inflation expectations remained anchored and financial stability risks were low.

There could also be scope to enhance the Fed’s communications toolkit. Given the global spillovers 

from U.S. monetary policy, a well-communicated normalization of U.S. monetary conditions, in the 

context of robust U.S. growth, would be positive for the global economy. 

57. Financial stability risks. Over the past few years, much has been done to reduce financial 

system risks: the banks are stronger, corporate balance sheets are healthy, leverage has been 

contained, and the regulatory framework has been greatly improved. Nevertheless, the prolonged 

period of very low interest rates continues to raise financial stability concerns, particularly related to 

activities in the so-called “shadow” banks and in other nonbank intermediaries. Steps that could be 

taken to tackle these risks and lessen the likelihood of negative spillovers to the global economy 

include tighter underwriting standards, higher risk weights, tighter limits on large exposures to riskier

assets, and stronger prudential norms for the holding of securitized loans by regulated entities. 

Addressing the remaining vulnerabilities of the money market funds and of the tri-party repo market 

also remains a priority. In addition, the U.S. should continue to implement measures that allow for 

the orderly resolution of too-important-to-fail financial institutions, including through deepening 

cooperation with other jurisdictions to manage the resolution of institutions with a significant crossborder presence. The insurance sector warrants particular attention and would benefit from stronger 

and more uniform capital adequacy and solvency oversight standards, refinement and harmonization 

of stress testing exercises, greater efforts to close data gaps, further designation of systemically 

important firms, and a larger federal role in insurance regulation and oversight. The U.S. should 
UNITED STATES

38 INTERNATIONAL MONETARY FUND

continue to play a lead role in advancing the global regulatory reform agenda, ensuring consistency

with international rules and best practices, and limiting the opportunities for regulatory arbitrage 

while remaining attuned to the spillover implications of regulatory changes on the international 

financial system. 

58. Housing finance. Limited availability of mortgage financing is a pressing constraint on 

economic growth. Policy efforts have been made to encourage greater availability of mortgage 

credit. However, the recovery of mortgage lending to lower-rated borrowers is likely to be a slow 

process. Legislative changes that clarify the future role of government in housing finance would help. 

While reaching agreement on legislation will be hard, in anticipation of broader legislative actions, 

many of these objectives can still be realized in the medium term through administrative action 

including expanding the use of market transactions to transfer first-loss risks from the agencies to 

private investors; moving gradually to higher and more risk-based guarantee fees; steadily building 

up capital within the agencies while reducing their role in housing finance; and establishing a single 

securitization platform. 

59. It is recommended that the next Article IV consultation take place on the standard 12-month 

cycle.
UNITED STATES

INTERNATIONAL MONETARY FUND 39

Table 1. Selected Economic Indicators 1/

(percentage change from previous period, unless otherwise indicated)

2012 2013 2014 2015 2016 2017 2018 2019

National production and income

Real GDP 2.8 1.9 1.7 3.0 3.0 2.9 2.8 2.6

Net exports 2/ 0.1 0.1 -0.2 -0.2 -0.3 -0.2 -0.1 -0.1

Total domestic demand 2.6 1.7 1.8 3.2 3.2 3.1 2.8 2.7

Private final consumption 2.2 2.0 2.2 2.9 2.8 2.7 2.7 2.7

Public consumption expenditure -0.2 -2.0 -0.6 0.2 0.2 0.5 0.7 1.0

Gross fixed domestic investment 5.5 2.9 2.4 6.3 7.1 6.1 4.4 3.3

Private fixed investment 8.3 4.5 3.5 7.1 8.0 6.7 4.7 3.4

Equipment and software 7.6 3.1 3.9 6.7 7.9 7.3 6.7 4.1

Intellectual property products 3.4 3.1 4.0 3.3 4.0 3.8 3.7 3.0

Nonresidential structures 12.7 1.3 2.2 5.6 5.0 2.7 2.6 2.4

Residential structures 12.9 12.2 3.2 13.4 14.6 11.2 4.2 3.4

Public fixed investment -4.0 -3.2 -2.1 2.5 2.7 3.2 3.0 2.9

Change in private inventories 2/ 0.2 0.2 -0.1 0.1 0.0 0.0 0.0 0.0

Nominal GDP 4.6 3.4 3.3 4.9 4.9 5.0 4.8 4.7

Personal saving rate (percent of disposable income) 5.6 4.5 4.3 4.0 4.2 4.3 4.1 4.0

Private investment rate (percent of GDP) 15.2 15.9 16.1 16.8 17.6 18.1 18.5 18.6

Employment and inflation

Unemployment rate 8.1 7.4 6.4 6.0 5.8 5.6 5.5 5.5

CPI inflation 2.1 1.5 1.8 1.8 1.9 2.0 2.0 2.0

Core CPI Inflation 2.1 1.8 1.8 1.9 2.0 2.1 2.0 2.0

PCE Inflation 1.8 1.1 1.5 1.6 1.6 1.8 1.9 2.0

Core PCE Inflation 1.8 1.2 1.4 1.7 1.7 1.8 1.9 2.0

GDP deflator 1.7 1.5 1.6 1.8 1.9 2.0 2.0 2.0

Output gap (percent of potential GDP) -4.0 -3.8 -4.0 -2.9 -2.0 -1.1 -0.6 0.0

Interest rates (percent)

Three-month Treasury bill rate 0.1 0.1 0.1 0.3 1.2 2.2 3.3 3.8

Ten-year government bond rate 1.8 2.4 2.7 3.3 4.0 4.5 5.0 5.1

Balance of payments

Current account balance (percent of GDP) -2.8 -2.4 -2.4 -2.6 -2.8 -2.8 -2.8 -2.7

Export volume 3/ 3.8 2.3 1.7 4.7 5.3 5.5 5.8 5.4

Import volume 3/ 2.1 1.2 2.3 5.4 6.1 5.9 5.5 5.0

Net international investment position (percent of GDP) -23.8 -27.2 -28.7 -29.5 -30.4 -31.3 -32.1 -32.8

Saving and investment (percent of GDP)

Gross national saving 16.2 17.1 17.1 17.6 18.2 18.8 19.2 19.4

General government -5.3 -2.8 -2.7 -2.0 -1.7 -1.4 -1.4 -1.7

Private 21.6 19.9 19.8 19.6 19.9 20.2 20.6 21.0

Personal 4.2 3.3 3.2 3.0 3.1 3.2 3.0 2.9

Business 17.3 16.6 16.7 16.7 16.8 17.1 17.6 18.2

Gross domestic investment 19.0 19.5 19.6 20.2 21.0 21.6 21.9 22.1

Private 15.2 15.9 16.1 16.8 17.6 18.1 18.5 18.6

Public 3.8 3.6 3.5 3.5 3.4 3.4 3.5 3.5

3/ NIPA basis, goods.

Sources: IMF staff estimates.

1/ Components may not sum to totals due to rounding.

2/ Contribution to real GDP growth, percentage points.

Projections
UNITED STATES

40 INTERNATIONAL MONETARY FUND

Table 2. Balance of Payments

(annual percent change unless otherwise indicated)

2012 2013 2014 2015 2016 2017 2018 2019

Real exports growth:

Goods and services 3.5 2.7 1.7 4.4 5.0 5.2 5.3 5.0

Goods 3.8 2.3 1.7 4.7 5.3 5.5 5.8 5.4

Services 3.0 3.5 1.6 3.8 4.2 4.4 4.2 4.0

Real imports growth

Goods and services 2.2 1.4 2.3 5.1 5.7 5.5 5.2 4.7

Goods 2.1 1.2 2.3 5.4 6.1 5.9 5.5 5.0

Nonpetroleum goods 4.8 3.1 3.2 7.2 7.6 6.9 6.4 5.7

Petroleum goods -8.2 -7.3 -2.0 -4.3 -3.2 -1.7 -1.3 -0.5

Services 2.7 2.5 2.2 3.8 4.0 3.9 3.6 3.3

Net exports contribution to real GDP growth 0.1 0.1 -0.2 -0.2 -0.3 -0.2 -0.1 -0.1

Nominal exports

Goods and services 13.5 13.5 13.4 13.4 13.4 13.6 13.7 13.9

Nominal imports

Goods and services 16.9 16.4 16.3 16.3 16.4 16.6 16.7 16.8

Current account

Current account balance -2.8 -2.4 -2.4 -2.6 -2.8 -2.8 -2.8 -2.7

Balance on trade in goods and services -3.3 -2.8 -2.8 -2.8 -2.9 -2.9 -2.9 -2.8

Balance on income 1.2 1.2 1.1 1.0 0.9 0.8 0.8 0.9

Capital and Financial Account

Balance on financial account 2.6 2.2 2.2 2.6 2.8 2.8 2.8 2.7

Foreign direct investment abroad -2.0 -2.1 -1.8 -1.9 -1.9 -1.9 -1.9 -1.9

Foreign direct investment in the U.S. 1.1 1.4 -0.1 0.5 0.5 0.5 0.5 0.5

Foreign acquisition of U.S. securities 2.5 1.7 3.3 2.8 2.9 2.9 2.8 2.9

Foreign acquisition of other U.S. liabilities -2.6 0.9 1.0 1.1 1.3 1.3 1.2 1.1

Net foreign direct investment -1.0 -0.7 -1.9 -1.4 -1.4 -1.4 -1.4 -1.4

Net portfolio investment 3.9 0.8 2.2 1.8 1.9 1.9 1.9 1.9

Portfolio investment assets -1.0 -2.6 -2.5 -2.6 -2.5 -2.5 -2.5 -2.5

Memo:

Current account balance in billions of dollars -461 -400 -423 -477 -531 -561 -582 -588

Non-oil trade balance in percent of GDP -1.5 -1.5 -1.6 -1.8 -2.0 -2.1 -2.1 -2.1

Broad real dollar, index 84.4 84.6 85.8 85.8 85.8 85.8 85.8 85.8

Foreign real GDP growth, pct chg, a.r. 2.7 2.5 2.8 3.2 3.3 3.3 3.2 3.2

U.S. real GDP growth, pct chg, s.a.a.r. 2.8 1.9 1.7 3.0 3.0 2.9 2.8 2.6

U.S. real total domestic demand growth, saar 2.6 1.7 1.8 3.2 3.2 3.1 2.8 2.7

Sources: IMF staff estimates.

Projections

(annual percent change)

(percent of GDP)
UNITED STATES

INTERNATIONAL MONETARY FUND 41

Table 3. Federal and General Government Finances

(percent of GDP)

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Federal government (staff)

Revenue 16.7 17.4 17.9 18.0 17.8 17.7 17.6 17.7 17.7 17.8 17.9 18.0

Expenditure 21.2 20.9 21.0 21.2 21.0 20.8 21.1 21.3 21.6 22.2 22.2 22.2

Non-interest 19.8 19.6 19.5 19.5 19.1 18.6 18.6 18.6 18.7 19.0 18.9 18.7

Interest exp 1.3 1.3 1.5 1.7 1.9 2.2 2.5 2.7 2.9 3.2 3.4 3.5

Budget balance 1/ -4.5 -3.5 -3.1 -3.2 -3.1 -3.1 -3.5 -3.7 -3.9 -4.4 -4.4 -4.2

 Primary balance 2/ -3.1 -2.2 -1.6 -1.5 -1.2 -0.9 -1.0 -1.0 -1.0 -1.2 -1.0 -0.7

 Primary structural balance 3/ 4/ -2.1 -1.2 -0.9 -1.0 -0.9 -0.8 -0.9 -1.0 -1.0 -1.2 -1.0 -0.7

 Change 2.1 0.9 0.4 -0.1 0.1 0.2 -0.2 0.0 0.0 -0.2 0.2 0.3

Federal debt held by the public 72.0 74.2 74.5 74.6 74.5 74.4 74.7 75.4 76.6 78.1 79.7 81.0

General government (staff)

Revenue 30.8 31.5 32.1 32.1 32.0 31.8 31.7 31.7 31.8 31.9 32.0

Expenditure 37.6 38.2 37.8 37.6 37.1 37.0 37.1 37.3 37.6 38.0 38.0

 Net interest 3.2 3.2 3.2 3.3 3.4 3.6 3.8 3.9 4.1 4.3 4.5

Net lending 1/ -6.8 -6.6 -5.7 -5.4 -5.1 -5.1 -5.4 -5.5 -5.8 -6.1 -6.0

Primary balance 2/ -3.6 -3.5 -2.5 -2.1 -1.7 -1.5 -1.6 -1.6 -1.7 -1.7 -1.5

Primary structural balance 3/ 4/ -2.6 -1.9 -1.3 -1.4 -1.2 -1.3 -1.6 -1.6 -1.7 -1.7 -1.5

 Change 1.5 0.7 0.5 0.0 0.1 -0.1 -0.3 -0.1 0.0 0.0 0.2

Gross debt 104.0 105.8 106.0 106.0 106.0 106.0 106.2 106.8 107.9 109.2 110.7

 Gross debt incl. unfunded pension liabilities 122.5 124.2 124.3 124.2 124.1 124.0 124.1 124.6 125.6 126.8 128.2

Memorandum items:

Federal government deficit (authorities)

President's FY2015 Budget -4.1 -3.7 -3.1 -2.8 -2.3 -1.9 -2.3 -2.2 -2.1 -2.1 -1.8 -1.6

CBO's Assessment of the Budget -4.1 -2.9 -2.8 -2.9 -2.7 -2.6 -3.0 -3.1 -3.1 -3.3 -3.0 -2.8

CBO Baseline Scenario (current law) -4.1 -2.9 -2.6 -2.8 -2.9 -3.0 -3.3 -3.5 -3.7 -4.0 -3.9 -3.7

Federal government debt (authorities)

President's FY2015 Budget 72.1 74.4 74.6 74.3 73.5 72.4 72.0 71.6 71.1 70.6 69.9 69.0

CBO's Assessment of the Budget 72.1 73.8 73.6 73.1 72.6 72.3 72.5 72.9 73.3 73.9 74.2 74.3

CBO Baseline Scenario (current law) 72.0 74.1 73.9 73.6 73.3 73.1 73.4 73.8 74.6 75.7 76.6 77.3

1/ Includes staff's adjustments for one-off items, incl. costs of financial sector support.

2/ Excludes net interest.

3/ Excludes net interest, effects of economic cycle, and costs of financial sector support.

4/ In percent of potential GDP.

Sources: Congressional Budget Office; Office of Management and Budget; and IMF staff projections. 

Note: Staff baseline counts in the savings from the reduction in overseas contingency operations and assumes that current tax policies are mostly 

extended (with the notable exception of bonus depreciation), Medicare payment rates are held constant, 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). By contrast, the President's Budget assumes only a few of the current tax policies will be extended (Earned 

Income Tax Credit and Child Tax Credit provisions extended under the American Taxpayer Relief Act of 2012 and due to expire in 2017) and the 

policy measures proposed by the Administration (including capping of deductions for higher-income taxpayers and immigration reform) will be 

implemented. CBO baseline does not count in the savings from the reduction in overseas contingency operations and assumes that expiring tax 

provisions are not extended, Medicare payment rates are reduced, and automatic spending cuts take place as currently written in law. 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. 

(calendar years; GFSM2001 basis)

(fiscal years; budget basis)

Projections
UNITED STATES

42 INTERNATIONAL MONETARY FUND

Table 4a. General Government Statement of Operations

(percent of GDP)

2007 2008 2009 2010 2011 2012 2013

Revenue 31.7 30.2 28.4 28.8 29.0 29.0 30.8

Taxes 20.6 19.1 17.0 17.6 18.5 18.8 19.3

Social contributions 6.7 6.7 6.7 6.6 5.9 5.9 6.6

Grants 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other revenue 4.3 4.3 4.6 4.6 4.6 4.3 4.9

Expenditure 1/ 35.7 38.0 43.1 41.3 40.1 38.7 37.6

Expense 34.0 36.3 41.3 39.6 38.7 37.5 36.6

Compensation of employees 9.5 9.8 10.3 10.3 10.0 9.6 9.3

Use of goods and services 5.8 6.2 6.5 6.5 6.3 6.1 5.7

Consumption of fixed capital 2.4 2.5 2.7 2.7 2.7 2.7 2.6

Interest 3.7 3.5 3.8 3.9 4.0 3.9 3.8

Subsidies 0.4 0.4 0.4 0.4 0.4 0.4 0.3

Grants 0.3 0.3 0.4 0.3 0.4 0.3 0.3

Social benefits 11.8 12.7 14.7 15.0 14.7 14.4 14.4

Of which: Social security benefits 7.5 8.0 9.3 9.3 9.1 9.0 9.0

Expense not elsewhere classified 0.2 0.9 2.5 0.5 0.3 0.2 0.1

Net acquisition of nonfinancial assets 1.7 1.7 1.8 1.7 1.4 1.2 1.0

Net operating balance 2/ -2.3 -6.1 -12.9 -10.8 -9.6 -8.5 -5.8

Net lending/borrowing 1/ -4.0 -7.8 -14.7 -12.5 -11.0 -9.7 -6.8

 Of which: Imputed interest on unfunded pension liabilities 0.7 0.7 1.2 1.1 1.1 1.1

Net acquisition of financial assets 1.1 3.1 1.0 2.0 -1.3 0.3 1.3

Net incurrence of liabilities 4.3 11.2 13.9 13.8 9.8 8.9 7.2

1/ Includes staff's adjustments for one-off items, including the cost of financial sector support.

2/ Revenue minus expense.

Source: Government Finance Statistics; IMF staff calculations.
UNITED STATES

INTERNATIONAL MONETARY FUND 43

Table 4b. General Government Financial Assets and Liabilities

(percent of GDP)

2007 2008 2009 2010 2011 2012 2013

Net worth 15.1 3.5 -9.4 -19.4 -26.6 -29.8 -28.0

 Nonfinancial assets 71.4 74.9 76.9 77.0 78.1 77.0 76.8

 Net financial worth -56.3 -71.4 -86.3 -96.4 -104.6 -106.8 -104.9

 Financial assets 19.6 20.6 18.8 19.0 16.1 15.7 16.9

 Currency and deposits 2.6 4.9 4.0 4.9 3.3 3.4 3.8

 Securities other than shares 5.6 5.6 6.5 6.3 5.1 4.4 4.3

 Loans 4.4 4.5 5.7 6.5 7.1 7.5 8.0

 Shares and other equity 2.5 1.5 -2.4 -3.2 -3.9 -3.9 -3.6

 Financial derivatives 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 Insurance technical reserves 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 Other accounts receivable 4.4 4.1 4.5 4.3 4.2 4.1 4.1

 Financial liabilities 75.9 92.0 105.1 115.4 120.7 122.5 121.7

 Special Drawing Rights (SDRs) 0.1 0.1 0.4 0.4 0.4 0.4 0.4

 Currency and deposits 0.2 0.2 0.2 0.2 0.2 0.2 0.2

 Securities other than shares 57.0 65.3 78.1 86.6 90.7 94.1 96.1

 Loans 0.1 0.1 0.1 0.1 0.1 0.1 0.1

 Shares and other equity 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 Financial derivatives 13.1 20.5 20.5 22.2 23.4 21.8 18.9

 Insurance technical reserves 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 Other accounts receivable 5.5 5.8 5.8 5.9 6.0 6.0 6.2

Source: Government Finance Statistics.
UNITED STATES

44 INTERNATIONAL MONETARY FUND

Annex I. Risk Assessment Matrix: Potential Deviations 

from Baseline1

Nature/Source of 

Risk

Overall Level of Concern

Likelihood of Realization Expected Impact if Risk Materializes 

1. Faster increase in 

interest rates

Medium Medium

The Fed may raise policy rates at a faster-thanexpected pace because inflation picks up earlier 

and/or because of heightened concerns on the 

financial stability effects of low interest rates. Recent 

compression in volatility and risk premia could 

unwind.

A 50 bps permanent increase in 10-year 

interest rates could subtract about 

1⁄2 percent of GDP after two years. Spikes 

in term premia could imply greater output 

losses. 

2. Distortions from 

a protracted 

period of low 

interest rates

Low High

Continued search for yield could lead to excess 

leverage, weaker underwriting standards and 

potential mispricing of risk.

If unaddressed, distortions could lead to 

financial instability with significant 

economic costs and large spillovers to the 

rest of the world.

3. Recovery in 

private 

investment

Medium Medium

Greater confidence in future economic prospects 

could cause private investment to recover at a faster 

pace than in the baseline.

A 5 percentage point increase in private 

investment growth would add about 

3⁄4 percentage points to GDP growth.

4. Labor market 

recovery

Medium Medium

The labor markets could surprise on the upside, 

especially if labor force participation were to 

rebound more than expected.

Employment growth of around 

11⁄2 percent would be consistent with GDP 

growth that is 1⁄4 percentage point higher 

than the baseline.

5. Protracted 

period of slower 

growth (and 

lower inflation) 

in advanced and 

emerging 

economies

High Medium

Lower-than-anticipated potential growth and 

persistently low inflation leads to secular stagnation 

in advanced economies. Maturing of the cycle, 

misallocation of investment, and incomplete 

structural reforms leads to prolonged slower growth 

in emerging markets.

Slower growth in advanced and emerging 

economies could subtract about 

1⁄2 percent of GDP after two years. 

 

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.
UNITED STATES

INTERNATIONAL MONETARY FUND 45

Nature/Source of 

Risk

Overall Level of Concern

Likelihood of Realization Expected Impact if Risk Materializes 

6. Increasing 

geopolitical 

tensions/risks 

surrounding 

Russia/ Ukraine 

or the Middle 

East

Medium Low

A sharp increase in geopolitical tensions 

surrounding Russia/Ukraine that creates significant 

disruptions in global financial, trade and commodity 

markets. Heightened geopolitical risks in the Middle 

East, leading to a sharp rise in oil prices.

A rise in oil prices would have a negative 

impact on the U.S. with a possible flight to 

safety resulting in dollar appreciation. A

sustained 15 percent increase in oil prices 

above baseline would subtract about 

0.2 percent of GDP after two years.

7. Failure to pass 

budget and raise 

debt limit in 

2015

Low High

The federal borrowing limit is not raised or the 

budget is not passed in 2015 owing to political 

gridlock.

The economic cost of failure to raise debt 

limit would be potentially catastrophic 

depending on how long the impasse lasts

with severe global spillovers.

8. U.S. bond market 

stress

Low High

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.

A 200bps increase in the benchmark 

Treasury yields would subtract 2.5 and 

1.5 percentage points from U.S. growth in 

2015 and 2016, respectively.
UNITED STATES

46 INTERNATIONAL MONETARY FUND

Annex II. Public Debt Sustainability Analysis (DSA)

The budget deficit in the United States has been reduced significantly since 2011. Yet, the public debt 

ratio remains on an unsustainable trajectory. Under the baseline scenario, general government gross 

debt is projected to briefly stabilize in 2015–18 at about 106 percent of GDP but starts rising again as 

spending pressures on entitlement programs rise and interest rates normalize. 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. Gross financing needs are large but 

manageable given the safe haven status of the United States. A medium-term, credible consolidation 

plan remains a key policy priority.

Background

About $2.8 trillion in medium-term 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.

a. The Budget Control Act enacted in August 2011 capped discretionary spending, saving about 

$900 billion over 10 years relative to the CBO baseline.

b. Additional savings worth $1.2 trillion over 10 years were triggered by the failure of the 

Congressional Committee on Deficit Reduction in November 2011. These cuts took effect in 

March 2013 through cancellation of budget authority (“sequestration”) in FY2013. The 

Bipartisan Budget Act of December 2013 partially reversed the cuts scheduled to take place 

in FY2014 and FY2015 but still kept three-fourths of the cuts in place and made up for the 

partial reversal by extending certain direct spending cuts scheduled to end in FY2021 to 

FY2022 and FY2023. The cuts in FY2014–23 will be executed through caps on appropriation 

levels.

c. The American Taxpayer Relief Act signed into law in January 2013 increased the top ordinary 

income tax rate as well as the tax rate on capital gains and dividends, phased out personal 

exemptions, and limited itemized deductions for upper-income taxpayers, raising $700 billion 

over 10 years relative to the CBO alternative baseline.

Despite the substantial deficit reduction achieved so far and the legislated savings in the pipeline, 

U.S. public finances remain on an unsustainable trajectory. 
UNITED STATES

INTERNATIONAL MONETARY FUND 47

Assessment

The baseline. For the purposes of the 10-year fiscal projections, real GDP growth is assumed to 

converge to the potential beyond the standard 5-year WEO horizon. Under staff’s baseline projection 

which, in addition to the legislated budgetary savings, includes the savings from the drawdown of 

overseas contingency operations and removal of emergency funding for disaster relief, the debt ratio 

temporarily stabilizes in 2015–18. However, the debt ratio starts rising again at the end of the decade

given the spending pressures from an aging population and excess cost growth in the health care 

sector (even taking into account the more optimistic trend growth based on the recent slowdown in 

health care expenditure growth rate). Federal debt held by the public is projected to increase from 

72 percent of GDP now to 81 percent of GDP in FY2024, with general government gross debt 

approaching 111 percent of GDP by CY2023.

Debt servicing costs. The fiscal projections are being substantially improved by 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 staff’s 

baseline, as monetary policy normalizes, the average interest rate is projected to rise gradually from 

the current historical lows and reach about 51⁄4 percent by 2023 (compared to a pre-crisis average of 

61⁄2 percent). As a result, real interest rates will become a major debt-creating flow after 2019. In 

staff’s view, aiming for a medium-term primary surplus of about 11⁄4 percent of GDP would be 

appropriate to put the public debt ratio firmly on a downward path. The target primary surplus 

would be even higher in the long run to bring the debt ratio closer to the pre-crisis levels by 2030.

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.

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 

17 percentage points above the baseline. If real GDP growth turns out to be one standard deviation 

below the baseline, the public debt would reach 122 percent of GDP in 2023. A scenario involving a 

1 percentage slippage in the planned consolidation over the next two years would lead to a gross 

debt-to-GDP ratio of 116 percent in 2023. A combined macro-fiscal shock could raise the public debt 

ratio as high as 137 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

48 INTERNATIONAL MONETARY FUND

Annex Table 1. United States: Public DSA—Risk Assessment

United States

Source: IMF staff.

5/ External financing requirement is defined as the sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external 

debt at the end of previous period.

4/ Long-term bond spread over German bonds, an average over the last 3 months, 03-Apr-13 through 02-Jul-13.

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

Debt level 1/ Real GDP 

Growth Shock

Primary 

Balance Shock

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:

Change in the 

Share of ShortTerm Debt

Foreign 

Currency 

Debt

Public Debt 

Held by NonResidents

Primary 

Balance Shock

Real Interest 

Rate Shock

Exchange Rate 

Shock

Contingent 

Liability Shock

Exchange Rate 

Shock

Contingent 

Liability shock

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.

Real Interest 

Rate Shock

External 

Financing 

Requirements

Real GDP 

Growth Shock

Heat Map

Upper early warning

Evolution of Predictive Densities of Gross Nominal Public Debt

(in percent of GDP)

Debt profile 3/

Lower early warning

(Indicators vis-à-vis risk assessment benchmarks, in 2013)

 Debt Profile Vulnerabilities

Gross financing needs 2/

1 2

Not applicable 

for United States

400

600

119 

bp

1 2

17

25

32%

1 2

1

1.5

-

0.5%

1 2

Bond spread External Financing 

Requirement

Annual Change in 

Short-Term Public 

Debt

Public Debt in 

Foreign Currency

(in basis points) 4/ (in percent of GDP) 5/ (in percent of total) (in percent of total)

0

20

40

60

80

100

120

140

160

2012 2014 2016 2018 2020 2022

Baseline Percentiles: 10th-25th 25th-75th 75th-90th

Symmetric Distribution

0

20

40

60

80

100

120

140

160

2012 2014 2016 2018 2020 2022

Restricted (Asymmetric) Distribution

0.5 is the max positive growth rate shock (percent)

1 is the max negative interest rate shock (percent)

no restriction on the primary balance shock

no restriction on the exchange rate shock

Restrictions on upside shocks:

30

45

30%

1 2

Public Debt Held 

by Non-Residents

(in percent of total)
UNITED STATES

INTERNATIONAL MONETARY FUND 49

Annex Table 2. United States: Public DSA—Realism of Baseline Assumptions

Source : IMF staff.

1/ Plotted distribution includes all countries, percentile rank refers to all countries.

2/ Projections made in the spring WEO vintage of the preceding year.

3/ Not applicable for United States, as it meets neither the positive output gap criterion nor the private credit growth criterion.

4/ Data cover annual observations from 1990 to 2011 for advanced and emerging economies with debt greater than 60 percent of GDP. Percent of 


sample on vertical axis.

Forecast Track Record, versus all countries

Boom-Bust Analysis 3/ Assessing the Realism of Projected Fiscal Adjustment

-1 0

-8

-6

-4

-2

0

2

4

6

2005 2006 2007 2008 2009 2010 2011 2012 2013

Year 2/

Real GDP Growth

Interquartile range (25-75) Median United States forecast error

-0.74

Has a percentile rank of: 20%

United States median forecast error, 2005-2013:

Distribution of 

forecast errors: 1/

(in percent, actual-projection)

-1 0

-8

-6

-4

-2

0

2

4

2005 2006 2007 2008 2009 2010 2011 2012 2013

Year 2/

Primary Balance

Interquartile range (25-75) Median

United States forecast error

-0.70

Has a percentile rank of: 38%

United States median forecast error, 2005-2013:

Distribution of 

forecast errors: 1/

(in percent of GDP, actual-projection)

-1 0

-6

-2

2

6

1 0

2005 2006 2007 2008 2009 2010 2011 2012 2013

Year 2/

Inflation (Deflator)

Interquartile range (25-75) Median United States forecast error

0.68

Has a percentile rank of: 39%

United States median forecast error, 2005-2013:

Distribution of 

forecast errors: 1/

(in percent, actual-projection) pessimistic optimistic

-6

-4

-2

0

2

4

6

8

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

Real GDP growth

United States

(in percent)

Not applicable for United States pessimistic optimistic pessimistic optimistic

0

2

4

6

8

1 0

1 2

1 4 Less-4

-3-2-1

012345678

Distribution 4/

United States

3-Year Adjustment in Cyclically-Adjusted 

Primary Balance (CAPB)

(Percent of GDP) More0

2

4

6

8

1 0

1 2 Less-4

-3-2-1

012345678

Distribution 4/

United States

3-Year Average Level of Cyclically-Adjusted 

Primary Balance (CAPB)

(Percent of GDP) More
UNITED STATES

50 INTERNATIONAL MONETARY FUND

Annex Table 3. United States: Public DSA—Baseline Scenario

As of July 02, 2013

2/ 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Sovereign Spreads Nominal gross public debt 74.4 102.4 104.5 105.8 106.0 106.0 106.0 106.0 106.2 106.8 107.9 109.2 110.7 EMBIG (bp) 3/ 134

Public gross financing needs 18.2 26.2 24.2 24.1 25.6 25.6 23.4 22.2 21.2 20.2 19.7 19.5 20.6 5Y CDS (bp) 16

Real GDP growth (in percent) 1.7 2.8 1.9 1.7 3.0 3.0 2.9 2.8 2.6 2.3 2.1 2.1 2.1 Ratings Foreign Local

Inflation (GDP deflator, in percent) 2.2 1.7 1.5 1.6 1.8 1.9 2.0 2.0 2.0 2.1 2.0 2.0 2.0 Moody's Aaa Aaa Nominal GDP growth (in percent) 4.0 4.6 3.4 3.3 4.9 4.9 5.0 4.8 4.7 4.4 4.1 4.1 4.1 S&Ps AA+ AA+

Effective interest rate (in percent) 4/ 5.6 4.1 3.8 1.4 1.6 2.2 3.0 3.5 4.0 4.5 5.0 5.6 5.9 Fitch AAA AAA

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 cumulative

Change in gross public sector debt 4.8 3.4 2.2 1.3 0.2 0.1 0.0 0.0 0.2 0.6 1.1 1.3 1.5 6.2

Identified debt-creating flows 6.0 5.9 3.9 1.5 -0.8 -0.7 -0.3 0.2 0.9 1.8 2.6 3.3 3.4 12.0

Primary deficit 4.8 6.3 3.6 3.5 2.5 2.1 1.7 1.5 1.6 1.6 1.7 1.7 1.5 19.5

Primary (noninterest) revenue and grants 29.1 28.5 30.3 31.0 31.5 31.5 31.2 31.0 30.8 30.8 30.8 30.9 31.0 310.5

Primary (noninterest) expenditure 34.0 34.8 33.8 34.5 34.0 33.6 32.9 32.5 32.5 32.4 32.5 32.7 32.5 330.0

Automatic debt dynamics 5/ 1.1 -0.4 0.4 -2.0 -3.3 -2.8 -2.0 -1.4 -0.7 0.1 1.0 1.6 1.9 -7.5

Interest rate/growth differential 6/ 1.1 -0.4 0.4 -2.0 -3.3 -2.8 -2.0 -1.4 -0.7 0.1 1.0 1.6 1.9 -7.5 Of which: real interest rate 2.2 2.2 2.2 -0.3 -0.2 0.3 1.0 1.4 1.9 2.4 3.1 3.7 4.1 17.4 Of which: real GDP growth -1.1 -2.6 -1.9 -1.7 -3.1 -3.1 -3.0 -2.8 -2.7 -2.3 -2.1 -2.1 -2.2 -24.9

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

Residual, including asset changes 8/ -1.1 -2.5 -1.8 -0.3 1.0 0.7 0.2 -0.2 -0.7 -1.2 -1.6 -2.0 -1.9 -5.8

Source: IMF staff.

1/ Public sector is defined as general government.

2/ Based on available data.

3/ Long-term bond spread over German bonds.

4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.

5/ Derived as [(r - π(1+g) - g + ae(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate;

a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

6/ The real interest rate contribution is derived from the numerator in footnote 5 as r - π (1+g) and the real growth contribution as -g.

7/ The exchange rate contribution is derived from the numerator in footnote 5 as ae(1+r). 

8/ Includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period.

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.

1.9

balance 9/

primary

Debt, Economic and Market Indicators 1 /

2003-2011

Actual

Projections

Contribution to Changes in Public Debt

Projections

2003-2011

Actual

debt-stabilizing

-10

-5

0

5

10

15

20

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Debt-Creating Flows 

Primary deficit Real GDP growth Real interest rate Exchange rate depreciation Other debt-creating flows Residual Change in gross public sector debt

projection

(in percent of GDP)

-40

-30

-20

-10

0

10

20

30

40

50

cumulative
UNITED STATES

INTERNATIONAL MONETARY FUND 51

Annex Table 4. United States: Public DSA—Composition of Public Debt and Alternative

Scenarios

Baseline Scenario 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Historical Scenario 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Real GDP growth 1.7 3.0 3.0 2.9 2.8 2.6 2.3 2.1 2.1 2.1 Real GDP growth 1.7 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8

Inflation 1.6 1.8 1.9 2.0 2.0 2.0 2.1 2.0 2.0 2.0 Inflation 1.6 1.8 1.9 2.0 2.0 2.0 2.1 2.0 2.0 2.0

Primary balance -3.5 -2.5 -2.1 -1.7 -1.5 -1.6 -1.6 -1.7 -1.7 -1.5 Primary balance -3.5 -5.0 -5.0 -5.0 -5.0 -5.0 -5.0 -5.0 -5.0 -5.0

Effective interest rate 1.4 1.6 2.2 3.0 3.5 4.0 4.5 5.0 5.6 5.9 Effective interest rate 1.4 1.6 2.6 3.9 4.7 5.6 7.0 7.6 8.2 8.5

Constant Primary Balance Scenario

Real GDP growth 1.7 3.0 3.0 2.9 2.8 2.6 2.3 2.1 2.1 2.1

Inflation 1.6 1.8 1.9 2.0 2.0 2.0 2.1 2.0 2.0 2.0

Primary balance -3.5 -3.5 -3.5 -3.5 -3.5 -3.5 -3.5 -3.5 -3.5 -3.5

Effective interest rate 1.4 1.6 2.2 3.0 3.5 4.0 5.2 5.7 6.1 6.3

Source: IMF staff.

Underlying Assumptions

(in percent)

Baseline Historical Constant Primary Balance

Alternative Scenarios

Composition of Public Debt

0

20

40

60

80

100

120

140

160

180

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Gross Nominal Public Debt

(in percent of GDP)

projection

0

5

10

15

20

25

30

35

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Public Gross Financing Needs

(in percent of GDP)

projection

0

20

40

60

80

100

120

2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023

By Maturity

Medium and long-term

Short-term

projection

(in percent of GDP)

0

20

40

60

80

100

120

2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023

By Currency

Local currency-denominated

Foreign currency-denominated

projection

(in percent of GDP)
UNITED STATES

52 INTERNATIONAL MONETARY FUND

Annex Table 5. United States: Public DSA—Stress Tests

Primary Balance Shock 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Real GDP Growth Shock 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Real GDP growth 1.7 3.1 3.1 3.0 2.8 2.6 2.3 2.1 2.1 2.1 Real GDP growth 1.7 1.1 1.1 2.9 2.8 2.6 2.3 2.1 2.1 2.1

Inflation 1.6 1.8 1.9 2.0 2.0 2.0 2.1 2.0 2.0 2.0 Inflation 1.6 1.3 1.4 2.0 2.0 2.0 2.1 2.0 2.0 2.0

Primary balance -3.5 -4.3 -4.0 -1.7 -1.5 -1.6 -1.6 -1.7 -1.7 -1.5 Primary balance -3.5 -4.1 -4.3 -3.3 -1.5 -1.6 -1.6 -1.7 -1.7 -1.5

Effective interest rate 1.4 1.6 2.2 3.1 3.6 4.1 5.3 5.8 6.3 6.5 Effective interest rate 1.4 1.6 2.2 3.1 3.5 4.1 5.3 5.8 6.3 6.5

Real Interest Rate Shock Real Exchange Rate Shock

Real GDP growth 1.7 1.8 2.0 2.3 2.4 2.4 2.1 1.9 1.9 1.9 Real GDP growth 1.7 3.0 3.0 2.9 2.8 2.6 2.3 2.1 2.1 2.1

Inflation 1.6 1.8 1.9 2.0 2.0 2.0 2.1 2.0 2.0 2.0 Inflation 1.6 1.8 1.9 2.0 2.0 2.0 2.1 2.0 2.0 2.0

Primary balance -3.5 -2.5 -2.1 -1.7 -1.5 -1.6 -1.6 -1.7 -1.7 -1.5 Primary balance -3.5 -2.5 -2.1 -1.7 -1.5 -1.6 -1.6 -1.7 -1.7 -1.5

Effective interest rate 1.4 1.6 2.5 3.7 4.5 5.3 6.8 7.5 8.2 8.5 Effective interest rate 1.4 1.6 2.2 3.0 3.4 4.0 5.3 5.8 6.3 6.5

Combined Shock

Real GDP growth 1.7 1.1 1.1 2.3 2.4 2.4 2.1 1.9 1.9 1.9

Inflation 1.6 1.3 1.4 2.0 2.0 2.0 2.1 2.0 2.0 2.0

Primary balance -3.5 -4.6 -4.3 -3.3 -1.5 -1.6 -1.6 -1.7 -1.7 -1.5

Effective interest rate 1.4 1.6 2.6 3.8 4.5 5.3 6.8 7.4 8.1 8.4

Source: IMF staff.

Underlying Assumptions

(in percent)

Baseline Primary Balance Shock

Real GDP Growth Shock

Real Interest Rate Shock

Baseline

Macro-Fiscal Stress Tests

Additional Stress Tests

Real Exchange Rate Shock

Combined Macro-Fiscal Shock

90

100

110

120

130

140

Gross Nominal Public Debt

(in percent of GDP)

250

300

350

400

450

Gross Nominal Public Debt

(in percent of Revenue)

0

5

10

15

20

25

30

Public Gross Financing Needs

(in percent of GDP)

90

100

110

120

130

140

Gross Nominal Public Debt

(in percent of GDP)

250

300

350

400

450

Gross Nominal Public Debt

(in percent of Revenue)

0

5

10

15

20

25

30

Public Gross Financing Needs

(in percent of GDP)
UNITED STATES

INTERNATIONAL MONETARY FUND 53

Annex III. U.S. Responses to Past Policy Advice

Fiscal policy. Over the last few years staff has emphasized the importance of a medium-term fiscal 

consolidation plan to restore long-run fiscal sustainability, stressing that early action is needed to 

slow entitlement spending. The prospects for such a comprehensive plan remain unfavorable, given 

the lack of political consensus. However, cost saving measures that were part of the Affordable Care 

Act appear to be lowering health care inflation. Staff also called for a more balanced and gradual

pace of fiscal consolidation in the near-term and the replacement of automatic spending cuts (also 

referred to as the sequester) with back-loaded savings. The Bipartisan Budget Act of December 2013 

moved in this direction by raising the spending caps imposed by the sequester for 2014 and 2015 in 

exchange for savings in future years. In addition, suspending the debt ceiling until March 2015 and 

passing the Consolidated Appropriations Act in early 2014 were all steps in a positive direction to 

lessen fiscal uncertainties.

Monetary policy. Given the large output gap and well-anchored inflation expectations, staff 

supported a highly accommodative monetary policy stance. Last year, it also stressed the importance 

of maintaining effective communications. The Fed continues to maintain a supportive monetary 

policy and have made increasing efforts—in FOMC statements, press conferences, and speeches—

to articulate is views on progress toward the Fed’s longer-term objectives. 

Financial policies. Substantial progress has been made on the national and global financial reform 

agenda over the last few years, and many of the policy suggestions contained in last year’s U.S. staff 

report have been implemented (including Basel III capital standards and the finalization of the 

Volcker rule). Still, a few reforms emphasized by staff remain to be completed, particularly those 

concerning the regulation of money market mutual funds.

Housing policy. Staff has stressed the need to reduce regulatory uncertainty (particularly on the 

risks that banks could be required to repurchase defaulted loans from the GSEs). Measures have 

been taken to lessen these uncertainties. Staff also called for a rapid completion of the regulation

requiring banks to retain part of mortgage risk on their balance sheet (i.e., the Qualified Residential 

Mortgage standards) and in advancing legislation to reshape housing finance. On the latter, 

legislative proposals have moved forward in Congress but the likelihood of these becoming law 

remains slim.

Structural policies. The Administration has launched new initiatives for job training and 

apprenticeships, in line with staff’s recommendations on more active labor market policies. Building a 

political consensus on a reform of the tax system in the direction envisaged by staff (a less complex 

system with a broader tax base and lower rates) remains difficult and there is no plan to introduce a 

VAT or a carbon tax. 
Annex IV. External Stability Assessment

United States Overall Assessment

Foreign asset and 

liability position 

and trajectory

Background. The net international investment position (NIIP) declined from -15 per cent of GDP in 2010 to -27 percent of GDP in 

2013, reflecting current account deficits as well as the stronger performance of the U.S. stock market relative to global markets. 

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 130 and 160 percent of GDP, respectively. Under staff’s baseline scenario, U.S. NIIP would deteriorate by about 

5 percentage points of GDP over the next five years.1

Assessment. Risks to external stability could arise from a decline in foreign demand for U.S. debt securities (the bulk of U.S. 

external liabilities), driven for example by a protracted failure to restore long-run fiscal sustainability. Still, given the dollar’s reserve 

currency status, current vulnerabilities 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 is broadly consistent 

with medium-term fundamentals and desirable 

policies. The US external position has improved 

considerably in recent years, as have assessed 

imbalances and fiscal policy gaps. The boom in 

unconventional energy production contributed 

to the improvement. Going forward, although 

there is some uncertainty on its full potential 

impact on the US current account, the positive 

term of trade shock is expected to boost 

national saving, partially offsetting the 

negative impact of stronger domestic 

investment.

Potential policy responses:

Over the medium term, fiscal consolidation 

should aim for a general government primary 

surplus of about 11⁄4 percent of GDP 

(corresponding to a federal government 

primary surplus of about 2 percent, higher 

than the 11⁄2 percent surplus envisaged in the 

President’s budget and staff’s projection of a 

small deficit). Structural policies should be 

implemented to raise productivity and labor 

force growth including by 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 continued to narrow from its pre-crisis height of 6 percent of GDP to 2.3 

percent in 2013, reflecting a sharp reduction in the fiscal deficit (which also helped to lower the global fiscal gap and hence the 

impact of U.S. policy distortions on other countries), 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). Going forward, the current 

account deficit is projected to widen to about 23⁄4 percent of GDP by 2019, as stronger private demand leads to a closure of the 

output gap but with the effect tempered by a further improvement in the energy balance.

Assessment. The EBA model estimates a CA gap of -1 percent of GDP for 2013. The staff view is broadly similar, on balance 

assessing the cyclically-adjusted current account to be between 0 and 1.5 percent of GDP weaker than the level implied by 

medium-term fundamentals and desirable policies.

Real exchange 

rate 

Background. The real effective exchange rate (REER) appreciated by about 2 percent during 2013, but remains around 10 percent 

below its average value over the past two decades. 

Assessment. Indirect estimates of the REER (drawing on the EBA current account estimate and the staff’s current account 

assessment range) suggest some overvaluation (within the 0 to 10 percent range). However, direct analyses of the REER in the EBA 

would suggest an undervaluation of around 8 percent in 2013.2Taking into account both methodologies, and acknowledging 

some uncertainty associated with the boom in unconventional energy production on the US external position, staff assesses the

REER to be broadly in line with medium-term fundamentals and desirable policies (with a range of -5 percent to +10 percent).

Capital and 

financial 

accounts: 

flows and policy 

measures

Background. Inflows and outflows picked up in 2013 but are substantially lower than pre-Lehman levels. Portfolio inflows halved 

in 2013 relative to 2012 but were more than offset by stronger bank inflows (which were negative in 2012). On the outflow side, 

there was a large increase in U.S. portfolio investment overseas. The U.S. dollar reserve currency status and safe haven motives 

boost foreign demand for U.S. Treasury securities during periods of market turbulence. Hence the outlook for U.S. capital flows will 

depend on global financial stability and the pace of the global recovery, as well as on the outlook for the U.S. economy and its 

public finances.

Assessment. The United States has a fully open capital account. Vulnerabilities are limited by the dollar’s status as a reserve 

currency and the United States’ role as a safe haven.

FX intervention 

and reserves 

Assessment. The dollar has the status of a global reserve currency. Reserves held by the U.S. are typically low relative to standard 

metrics, but the currency is free floating.

Technical 

Background 

Notes

1

Forecasts of U.S. NIIP reflect mainly projected CA flows.

2

Such REER regression models may, however, be less reliable and have difficulty explaining the REER’s weakness (relative to its 

own history) in terms of changing fundamentals or policy distortions. 

UNITED STATES

Annex IV. External Stability Assessment

54 INTERNATIONAL MONETARY FUND
UNITED STATES

STAFF REPORT FOR THE 2014 ARTICLE IV 

CONSULTATION—INFORMATIONAL ANNEX

Prepared By The Western Hemisphere Department

FUND RELATIONS _______________________________________________________________________ 2

STATISTICAL ISSUES ____________________________________________________________________ 4

CONTENTS

July 7, 2014
UNITED STATES

2 INTERNATIONAL MONETARY FUND

FUND RELATIONS (AS OF MAY 31, 2014)

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 31,553.57 74.91

Reserve Tranche Position 10,567.04 25.09

Lending to the Fund

New Arrangements to Borrow 9,130.05

Percent

SDR Department: SDR Million Allocation

Net cumulative allocation 35,315.68 100.00

Holdings 35,844.23 101.50

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 

2014 2015 2016 2017 2018

Principal

Charges/Interest 0.24 0.24 0.24 0.24

Total 0.24 0.24 0.24 0.24

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 on June 2014

(see EBD/14/35, June 19, 2014).
UNITED STATES

INTERNATIONAL MONETARY FUND 3

Article IV Consultation. The 2013 Article IV consultation was concluded on July 24, 2013 and the 

Staff Report was published as IMF Country Report No. 13/236. A fiscal Report of Observance of 

Standards and Codes was completed in the context of the 2003 consultation. A Financial System 

Assessment Program involved two missions, during October 14–November 3, 2009 and February 

17–March 12, 2010. The Financial System Stability Assessment was discussed at the Board, together 

with the 2010 Article IV Consultation, on July 26, 2010.

The 2014 Article IV discussions took place April 30–May 23, 2014. Concluding meetings with Chair

Yellen of the Board of Governors of the Federal Reserve System, and Treasury Secretary Lew

occurred on June 12th. The Managing Director, Ms. Lagarde, the Deputy Managing Director, Mr. 

Shinohara, and WHD Director, Mr. Werner, participated in the concluding meetings. A press 

conference on the consultation was held on June 16th, 2014. The team comprised Nigel Chalk (head), 

Roberto Cardarelli, Ravi Balakrishnan, Francesco Columba, Deniz Igan, Lusine Lusinyan, Juan Solé, 

and Jarkko Turunen (all WHD); Niklas Westelius (SPR); David Jones (MCM). Simon Gray, John Kiff, 

Darryl King (all MCM), Steve Dawe, Emmanuel Mathias (all LEG), and Michele Ruta (SPR) participated 

in some of the meetings. Mr. Haarsager (Executive Director) and Mr. Weiss (Advisor) attended some 

of the meetings. Outreach included discussions with Congressional staff 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.
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. Coverage of international capital flows in external sector statistics has been improved, 

with the June 2014 releases of BOP and IIP data on financial derivatives. 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 18, 2014)

Date of 

latest 

observation

Date 

received

Frequency 

of data1

Frequency of 

reporting1

Frequency of 

publication1

Exchange rates June 16 June 16 D W W

International reserve assets and reserve 

liabilities of the monetary authorities2

May 14 May 14 M M M

Reserve/base money June 12 June 12 W W W

Broad money June 12 June 12 W W W

Central bank balance sheet June 12 June 12 W W W

Interest rates3same day same day D D D

Consumer price index May 2014 June 17 M M M

Revenue, expenditure, balance and 

composition of financing4—general 

government5

2013 Q4 Jan. 31 Q Q Q

Revenue, expenditure, balance and 

composition of financing4—central 

government

May 2014 June 11 M M M

Stocks of central government and central 

government-guaranteed debt

May 2014 June 11 M M M

External current account balance 2014 Q1 June 18 Q Q Q

Exports and imports of goods and 

services

Apr. 2014 June 4 M M M

GDP/GNP (2

nd

release) 2014 Q1 June 29 Q M M

Gross External Debt 2013 Q4 Dec. 31 Q Q Q

International Investment Position62013 March 26 A A A

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 22, 2014

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. Recent indicators. Labor market conditions continued to improve. Jobless claims fell 

in the first week of July and are on a downward path from earlier in the year. The number of 

job openings rose in May to their highest levels since August 2007. Retail sales growth in 

June was solid and there were upward revisions to the data for April and May. An increase in 

the July homebuilder’s index suggests improving confidence in the housing recovery. The

Fed’s Empire manufacturing index for July was at its highest level since May 2010 and 

industrial production grew at (an annualized) 5.5 percent in the second quarter of the year.

3. Fed outlook. In testimony to the Congress on July 15 and 16, Chair Yellen noted that

the still-elevated unemployment rate, depressed participation rates, and slow pace of wage 

growth suggest that the level of slack in the labor market remains considerable, despite recent 

improvements in labor market indicators. Chair Yellen noted that “almost all” FOMC 

participants expected the first rate hike at some time in 2015 and that asset purchases would 

likely conclude after the October FOMC meeting. The Fed Chair assessed that the threats to 

financial stability at this stage appeared moderate. 

4. Regulatory cooperation. On July 8, the US Treasury and the European Commission 

reiterated their commitment to cooperate on financial market regulation, in particular on 

OTC derivatives regulation and cross-border resolution.

5. The Mid-Session Budget Review. The growth projection for 2014 was revised down 

from 3.1 percent in the March Budget to 2.4 percent (although the estimate does not 

incorporate the latest GDP estimate for Q1). Average growth in 2015–19 is also projected to 

be slightly lower than in the Budget. These revisions imply there will be modestly larger 

fiscal deficits and a higher debt-to-GDP ratio over the medium term. Nevertheless, the 

federal deficit for FY2014 and 2015 has been revised down by around 1⁄4 percent of GDP in 

each year (to 3.4 and 2.9 percent of GDP respectively) due to slower-than-expected spending 

in a range of programs (including the use of Hurricane Sandy recovery funds, defense

spending, and healthcare). 

6. Legislative action. On July 9, Congress passed the “Workforce Innovation and 

Opportunity Act”, a compromise between the Senate and House versions of a bill that

reauthorizes and streamlines the existing job training programs and gives states more 

flexibility in using federal funds. Committees in the House and Senate have both approved 

measures to temporarily address the funding of the Highway Trust Fund; work will now aim 

to reconcile the differences between the two proposals.
Press Release No.14/359

FOR IMMEDIATE RELEASE 

July 23, 2014

IMF Executive Board Concludes 2014 Article IV Consultation with the United States 

On July 22, 2014, the Executive Board of the International Monetary Fund (IMF) concluded 

the Article IV consultation with the United States.1

Economic activity in the U.S. accelerated in the second half of 2013, but an unusually harsh 

winter conspired with other factors—including an inventory correction, a still-struggling 

housing market, and slower external demand—caused momentum to fade in early 2014, 

leading to a contraction in growth of 2.9 percent in the first quarter. 

Over the past few months, however, a broad-based improvement appears to be unfolding as 

evidenced by stronger employment and industrial production numbers. Looking ahead, 

activity is projected to accelerate in the remainder of this year to well-above potential (in the 

3–31⁄2 percent range), although the drag on growth from the first quarter contraction will not 

be offset. This means growth for the year as a whole will be a disappointing 1.7 percent. 

More positively, barring unforeseen shocks, 2015 growth should accelerate to the fastest 

annual pace since 2005, propelled by strong consumption growth, a declining fiscal drag, a 

pickup in residential investment, and easy financial conditions. 

Risks around this outlook include slowing growth in emerging markets, oil price spikes 

related to events in Ukraine and Iraq, and earlier-than-expected interest rate rises. However, 

as confidence in the recovery picks up, nonresidential investment could grow more than 

expected and labor force participation could bounce back.

 

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. 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 summing ups can be found 

here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

International Monetary Fund

Washington, D.C. 20431 USA
2

Looking at the medium term, potential growth is forecast to average just above 2 percent for 

the next several years, significantly below the historic average growth rate. This downgrade 

reflects the effects of an aging population and more modest prospects for productivity 

growth. This makes it critical for the authorities to take immediate steps to raise productivity, 

encourage innovation, augment human and physical capital, and increase labor force 

participation. Moreover, recent growth has not been particularly inclusive, with the latest 

data pointing to almost 50 million Americans living in poverty (as shown by the Census 

Bureau’s supplemental poverty measure) and the official poverty rate stuck above 15 percent 

despite the ongoing recovery. In terms of policy actions, the Federal Reserve has made 

important and substantive efforts to increase transparency and has adopted an adaptable 

approach to communication. The recent shift to qualitative forward guidance provides the 

Fed with greater flexibility but puts an even higher premium on clear and systematic 

communication to guide expectations. On the fiscal side, following the debt ceiling 

brinkmanship and the government shutdown in October 2013, the Bipartisan Budget Act and 

the subsequent raising of the debt ceiling were important steps to reduce fiscal risks.

However, the need for a medium-term fiscal adjustment to ensure a downward path for the public 

debt remains. On the financial side, progress has been achieved on variety of fronts, including

implementing the Dodd Frank Act, finalizing the Volcker rule, and designating another 

systemic important financial institution. In addition, the U.S. recently put in place a rule to 

require foreign bank organizations over a certain size to incorporate as holding companies, a 

move that aligns the treatment of foreign and U.S. banks that are operating in the U.S. and 

eliminates an existing regulatory distortion.

Executive Board Assessment2

Executive Directors broadly agreed with the thrust of the staff appraisal. They welcomed 

signs of a meaningful economic rebound following a temporary setback in the first quarter of 

2014. Directors noted that stronger growth is expected to be underpinned by a continuation 

of accommodative monetary policy, a substantial reduction in the fiscal drag, and improved 

labor and housing conditions. At the same time, however, risks and uncertainties continue to 

weigh on the outlook, including the pace of interest rate increases and market expectations, 

and growth prospects in other advanced and emerging market economies. Directors 

underscored that higher growth in, and strong policy action by, the United States would have 

important positive global spillovers.

Directors supported focusing policy efforts on managing monetary policy normalization, 

raising potential growth, reducing long-term unemployment, tackling poverty, and 

maintaining debt sustainability over the medium term. Achieving these objectives would call 

for wide-ranging measures—and, more importantly, political consensus—in such areas as 

 

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

investments in infrastructure and education, a comprehensive tax reform, active labor market 

policies, and a skills-based approach to immigration reform. Directors concurred that an 

expansion of the Earned Income Tax Credit, possibly complemented by a higher minimum 

wage, would help address poverty and inequality while promoting labor participation.

Directors welcomed the Bipartisan Budget Act and the subsequent raising of the debt ceiling 

as important steps to address fiscal risks. They emphasized the critical importance of 

reaching agreement on a credible medium-term fiscal consolidation plan, which would help 

to articulate a roadmap for achieving debt sustainability and provide an important anchor for 

fiscal policy to support the recovery in the short run. In this regard, while a few Directors 

stressed the need to stay the course of fiscal consolidation, most saw scope for expanding the 

near-term budget envelope in areas with a high and lasting growth impact, which would need 

to be funded by savings in future years, including through upfront action to control health 

care and entitlement spending. Directors also encouraged steps to improve budget procedures 

and the institutional framework more broadly, with a view to reducing uncertainty in the 

future.

Directors agreed that the current highly accommodative stance of monetary policy is 

appropriate, consistent with the Federal Reserve’s objectives of maximum employment and 

price stability. They generally viewed that, in the case of a slow progression toward full 

employment and continued subdued inflation, policy rates could stay at zero for longer than 

currently anticipated so long as inflation expectations remain firmly anchored. Directors 

recommended, however, that the authorities monitor wage developments closely and remain 

cognizant of financial stability risks. They welcomed the Federal Reserve’s forward guidance 

and recommended continued efforts to enhance its communications to provide greater clarity 

about monetary policy decisions, ensuring a smooth normalization. 

Directors welcomed progress in strengthening the resilience of the financial system over the 

past few years. They called for continued vigilance to potential systemic risks associated with 

the prolonged period of very low interest rates, particularly activities of nonbank 

intermediaries. Directors underscored the benefits of a strong macroprudential framework, 

and tightened supervision and prudential norms across banks and nonbanks, with a few 

suggesting that care be taken to ensure a level playing field between domestic and foreign 

banks. Directors looked forward to continued U.S. leadership in advancing the global 

financial regulatory reform agenda. 

Directors acknowledged recent initiatives to address remaining weaknesses in the housing 

market. They encouraged further steps to improve the availability of mortgage financing and 

to clarify the role of the government in housing finance, including through administrative 

action as efforts on broader legislative changes continue.
4

Table 1. United States: Selected Economic Indicators 1/

(percentage change from previous period, unless otherwise indicated)

Projections

2012 2013 2014 2015 2016 2017 2018 2019

National production and income

Real GDP 2.8 1.9 1.7 3.0 3.0 2.9 2.8 2.6

Net exports 2/ 0.1 0.1 -0.2 -0.2 -0.3 -0.2 -0.1 -0.1

Total domestic demand 2.6 1.7 1.8 3.2 3.2 3.1 2.8 2.7

Final domestic demand 2.4 1.6 1.8 3.2 3.2 3.1 2.8 2.6

Private final consumption 2.2 2.0 2.2 2.9 2.8 2.7 2.7 2.7

Public consumption expenditure -0.2 -2.0 -0.6 0.2 0.2 0.5 0.7 1.0

Gross fixed domestic investment 5.5 2.9 2.4 6.3 7.1 6.1 4.4 3.3

Private fixed investment 8.3 4.5 3.5 7.1 8.0 6.7 4.7 3.4

Equipment and software 7.6 3.1 3.9 6.7 7.9 7.3 6.7 4.1

Intellectual property products 3.4 3.1 4.0 3.3 4.0 3.8 3.7 3.0

Nonresidential structures 12.7 1.3 2.2 5.6 5.0 2.7 2.6 2.4

Residential structures 12.9 12.2 3.2 13.4 14.6 11.2 4.2 3.4

Public fixed investment -4.0 -3.2 -2.1 2.5 2.7 3.2 3.0 2.9

Change in private inventories 2/ 0.2 0.2 -0.1 0.1 0.0 0.0 0.0 0.0

Nominal GDP 4.6 3.4 3.3 4.9 4.9 5.0 4.8 4.7

Personal saving rate (percent of 

disposable income) 5.6 4.5 4.3 4.0 4.2 4.3 4.1 4.0

Private investment rate (percent 

of GDP) 15.2 15.9 16.1 16.8 17.6 18.1 18.5 18.6

Employment and inflation

Unemployment rate 8.1 7.4 6.4 6.0 5.8 5.6 5.5 5.5

CPI inflation 2.1 1.5 1.8 1.8 1.9 2.0 2.0 2.0

Core CPI Inflation 2.1 1.8 1.8 1.9 2.0 2.1 2.0 2.0

PCE Inflation 1.8 1.1 1.5 1.6 1.6 1.8 1.9 2.0

Core PCE Inflation 1.8 1.2 1.4 1.7 1.7 1.8 1.9 2.0

GDP deflator 1.7 1.5 1.6 1.8 1.9 2.0 2.0 2.0

Output gap (percent of potential 

GDP) -4.0 -3.8 -4.0 -2.9 -2.0 -1.1 -0.6 0.0

Government finances

Federal government (budget, 

fiscal years)

Federal balance (percent of GDP) -6.7 -4.5 -3.5 -3.1 -3.2 -3.1 -3.1 -3.5

Debt held by the public (percent 

of GDP) 70.1 72.0 74.2 74.5 74.6 74.5 74.4 74.7

General government (GFSM 

2001, calendar years)

Net lending (percent of GDP) -9.7 -6.8 -6.6 -5.7 -5.4 -5.1 -5.1 -5.4

Primary structural balance 

(percent of potential nominal 

GDP) -4.1 -2.6 -1.9 -1.3 -1.4 -1.2 -1.3 -1.6

Gross debt (percent of GDP) 102.0 104.0 105.8 106.0 106.0 106.0 106.0 106.2

Interest rates (percent)

Three-month Treasury bill rate 0.1 0.1 0.1 0.3 1.2 2.2 3.3 3.8

Ten-year government bond rate 1.8 2.4 2.7 3.3 4.0 4.5 5.0 5.1
5

Balance of payments

Current account balance 

(percent of GDP) -2.8 -2.4 -2.4 -2.6 -2.8 -2.8 -2.8 -2.7

Export volume 3/ 3.8 2.3 1.7 4.7 5.3 5.5 5.8 5.4

Import volume 3/ 2.1 1.2 2.3 5.4 6.1 5.9 5.5 5.0

Net international investment 

position (percent of GDP) -23.8 -27.2 -28.7 -29.5 -30.4 -31.3 -32.1 -32.8

Saving and investment (percent 

of GDP)

Gross national saving 16.2 17.1 17.1 17.6 18.2 18.8 19.2 19.4

General government -5.3 -2.8 -2.7 -2.0 -1.7 -1.4 -1.4 -1.7

Private 21.6 19.9 19.8 19.6 19.9 20.2 20.6 21.0

Personal 4.2 3.3 3.2 3.0 3.1 3.2 3.0 2.9

Business 17.3 16.6 16.7 16.7 16.8 17.1 17.6 18.2

Gross domestic investment 19.0 19.5 19.6 20.2 21.0 21.6 21.9 22.1

Private 15.2 15.9 16.1 16.8 17.6 18.1 18.5 18.6

Public 3.8 3.6 3.5 3.5 3.4 3.4 3.5 3.5

Sources: 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.