Summary:KEY ISSUES Strategy: The 2015 U.S. Article IV consultation centered on the prospects for higher policy rates and the outlook for, and policy response to, financial stability risks, integrating the findings of the Financial Sector Assessment Program (FSAP). Main findings and policy messages: • The underpinnings for continued growth and job creation remain in place despite momentum being sapped in recent months. • The FOMC should remain data dependent, carefully weighing the risk of weakening progress toward full employment and having to return to zero interest rates versus the risk of creating a temporary rise of inflation above the Fed’s medium-term goal and having to subsequently raise policy rates at a faster pace. • The FOMC should defer its first increase in policy rates until there are greater signs of wage or price inflation than are currently evident. Based on staff’s macroeconomic forecast, and barring upside surprises to growth and inflation, this would imply a gradual path of policy rate increases starting in the first half of 2016. • Pockets of financial vulnerabilities are emerging, putting a premium on improving the resilience of the financial system. Regulatory reforms remain incomplete and the structure of oversight has scope to be strengthened along a number of dimensions. • A credible and detailed medium-term consolidation plan is needed to address rising health and social security costs and to improve the tax system. Such a plan would provide near-term fiscal space to finance supply-side measures that support future growth. • A range of policy challenges linked to poverty, productivity, and labor force participation remain largely unaddressed.
