United States of America: Staff Concluding Statement of the 2026 Article IV Mission

Washington, DC - February 20, 2026:

U.S. policymakers have embarked on a systemic reorientation of the U.S. economy with the overarching goal to increase economic self-reliance and, in doing so, to boost the living standards of American workers. This has manifested in efforts to increase domestic manufacturing capacity; reduce the trade deficit and the U.S.'s reliance on foreign-produced goods; increase domestic energy output; reduce the reliance on unauthorized immigrant workers; and reduce the federal government's role in the economy. The 2026 Article IV consultation focuses on the macroeconomic effects of the shift in policies undertaken in 2025 and their impact on the U.S., on trading partners, and on the global economy more broadly.

A Buoyant Economy

The U.S. economy has performed well in 2025, in line with staff's January 2025 WEO forecast, albeit with a very different policy mix than was anticipated at the time those forecasts were made. Growth reached 2.2 percent (on a q4/q4 basis) in 2025, driven by continued strong productivity growth even though the government shutdown took a bite out of activity in the fourth quarter. PCE inflation moved sideways during the year with tariffs boosting goods inflation as services inflation continued to fall. Employment growth has slowed markedly. Despite this, labor markets remain close to full employment (with unemployment at 4.3 percent in January 2026). The inflow of foreign-born workers has fallen sharply while labor force participation of prime age workers rose. Financial conditions remained loose for much of the year with equity markets reaching all-time highs and corporate spreads falling close to all-time lows. The federal fiscal deficit fell from 6.3 percent of GDP in FY24 to 5.9 percent of GDP in FY25. The external position in 2025 was moderately weaker than implied by medium-term fundamentals and desirable policies.

Implications of Recent Policy Changes for the Outlook

Fiscal Policy. The tax and spending changes that were legislated in 2025 are expected, in the near term, to provide a modest boost to activity (adding around 0.75 percent to the level of GDP in 2026-27) and to raise the deficit by around 1½ percent of GDP. Much of this boost to activity comes from the more generous tax treatment of capital spending and a lower household income tax burden. However, from 2029 onwards, as some of these tax provisions expire and spending cuts grow, fiscal policy will tighten creating a net drag on growth.

Tariffs . Higher tariffs should modestly lower the trade deficit and raise around ¾ percent of GDP in revenue in the near term. They do, though, represent a negative supply shock to the U.S. economy which is expected to raise the PCE price index (by around ½ percent by early 2026) and reduce the level of output (by around ½ percent).

Immigration Policies . Stricter border enforcement and increased removals are expected to reduce the size of the foreign-born labor force in the coming years resulting in slower employment growth, a modest increase in inflationary pressures, and a reduction in activity of around 0.4 percent by 2027.

Deregulation . The new administration is undertaking a wholesale re-examination of the U.S. approach to regulation including by requiring that every new regulation be accompanied by the elimination of ten existing regulations. Steps to boost the energy sector-by making it easier to develop fossil fuel, geothermal, biofuel, nuclear and hydroelectric assets and tilting the relative incentives away from renewables and toward the production and consumption of higher carbon energy sources-has been a particular focus. Actions are also underway to recalibrate or eliminate certain financial regulatory requirements, tailor supervision to the underlying risk of the activity, and introduce a regulatory framework for digital assets. These measures should support greater economic dynamism. However, it is difficult at this point to quantify either the degree to which regulations have been loosened or the macroeconomic effects of these changes.

The Outlook

Incorporating the effects of the various policy changes outlined above, staff expect growth to accelerate in 2026 to around 2.4 percent (on a q4/q4 basis). The inflationary impulse from tariffs is expected to wane in the coming months, allowing core PCE inflation to fall back to 2 percent by early 2027. Risks to the near-term outlook for growth and inflation are seen as balanced (see below).

Employment is expected to grow at less than one-half of the pace seen in the five years prior to the pandemic. However, given the ongoing slowing of population growth, the unemployment rate should remain close to 4 percent in 2026-27. Staff has lowered its estimate of medium-term potential growth by ¼ percentage point (relative to the estimate at the time of the 2024 Article IV) with lower labor force growth expected to more-than-offset the gains in labor productivity.

The current account deficit is expected to decline modestly over the medium-term-to around 3½ percent of GDP-but remain well above levels prevailing prior to the pandemic. After having declined somewhat in 2025, the federal deficit is expected to exceed 6 percent of GDP in the next few years, and the federal debt-GDP ratio is expected to steadily increase over the medium term.

Near-Term Risks to Activity

There are potential upsides to the growth outlook arising from the ongoing and proposed deregulatory efforts which could further loosen financial conditions, spur investment, release supply constraints, and reduce energy costs. In addition, the surge in labor productivity seen over the past three years could endure, especially if technology adoption accelerates and the ongoing investments in infrastructure and intellectual property bear fruit.

There are two-sided risks from tariffs, taxes, and labor market dynamics. The passthrough of tariffs to consumer prices could be lower-than-expected (which would lead to a more front-loaded disinflation and better activity outturns). Alternatively, uncertainty around trade policies could represent a larger-than-expected drag on activity (particularly if the reconfiguration of supply chains proves difficult in the near-term). The effects of changes in corporate and personal income taxes and in spending could imply upside or downside risks to activity (given the wide range of multipliers estimated in the literature). Finally, the uncertain path for the labor market creates two-sided risks. Higher labor force participation, smaller-than-expected reductions in overall immigrant inflows, or more sustained gains in labor productivity could allow for a higher level of activity. Alternatively, a more pronounced shortage of labor (particularly in sectors reliant on immigrant workers like agriculture and construction where productivity gains may be harder to achieve) could lead to sectoral disruptions and lower growth.

On the downside, if the promise of recent technology investments disappoints this could lead to tighter financial conditions, a weakening of aggregate demand, and more binding supply side constraints on activity.

Monetary Policy

With slowing job growth and few signs of second round effects from tariffs, it was appropriate for the Fed to remove monetary policy restraint during the course of 2025. Staff view risks to the Fed's maximum employment and price stability mandate as balanced and see only modest scope to lower the policy rate over the coming year (i.e., to ensure the ex ante real federal funds rate remains broadly unchanged during the year).

Under staff's baseline outlook, the federal funds rate would reach 3¼-3½ percent by end-2026 which should allow the economy to return to full employment and 2 percent inflation by early 2027. A larger monetary easing would need to be predicated on a material worsening in labor market prospects. As always, future changes in the policy rate will need to be attentive to incoming information. Continuing to clearly communicate the FOMC's interpretation of incoming data should ensure that any needed shifts in the monetary stance are well understood and smoothly absorbed.

The Fed has rightly discontinued the runoff of its balance sheet, started to undertake reserve management purchases, and enhanced standing repo operations. Looking forward, the Fed's predictable, periodic asset purchases should be geared to ensuring an ample level of bank reserves so as to mitigate potential volatility in money market conditions.

The Fed's policy credibility represents a highly valuable asset which should be carefully guarded, including by ensuring the Fed's monetary policy decisions remain independent and firmly focused on achieving its statutory mandate of price stability and maximum employment.

Fiscal Policy

Under current policies, the general government deficit is expected to remain in the 7-8 percent of GDP range, causing general government debt to reach 140 percent of GDP by 2031. While the risk of sovereign stress in the U.S. is low, the upward path for the public debt-GDP ratio and increasing levels of short-term debt-GDP represent a growing stability risk to the U.S. and global economy.

In addition to raising public debt, the recent changes in fiscal, trade and immigration policies will have important distributional effects. The reduced taxation of tips and overtime pay, combined with increases in the child tax credit, should boost household incomes. However, staff models suggest that reductions in Medicaid and food assistance, combined with higher tariffs, will act in the opposite direction, resulting in materially lower real disposable incomes for the bottom third of the income distribution and an increase in the poverty rate. After 2029, when the more progressive income tax provisions are scheduled to expire, the combined effect of these policy changes is expected to lead to lower real disposable income for the bottom half of the income distribution.

A clear, frontloaded fiscal consolidation plan is needed to put debt-GDP on a downward trajectory. This will require a shift to a general government primary surplus of around 1 percent of GDP (an adjustment of around 4 percent of GDP relative to the current baseline). Achieving this needed realignment of the fiscal position will require going beyond the ongoing efforts to identify efficiencies in discretionary, non-defense federal spending (which makes up only 15 percent of total federal outlays). Rather, the bulk of this adjustment will need to be borne by increases in federal revenues and a rebalancing of entitlement programs (notably social security and Medicare). To protect poorer households and prevent a worsening of the income distribution, adjustments in the social safety net will also be needed. Reducing the fiscal deficit would not only serve to address debt sustainability concerns but would also facilitate a reduction in the current account imbalance.

Trade Policy

International trade has fostered growth, job creation, and resilience in both the U.S. and abroad. However, there is broad recognition that more needs to be done to increase supply chain resilience, to eliminate the various policy distortions-both in the U.S. and other countries-that have led to high external imbalances, and to ensure that the benefits of trade are broadly shared across society.

In this regard, higher tariffs create costs by distorting the allocation of productive resources, disrupting global supply chains, and undermining the benefits of global trade. The U.S. should work constructively with its trading partners to address concerns over unfair trade practices and agree on a coordinated reduction in trade restrictions and industrial policy distortions that have negative cross-border effects. Where trade and investment measures (including tariffs and export controls) are put in place for national security reasons, such policies should be applied narrowly, so as to minimize their negative effects at both home and abroad.

Financial Stability

As outlined in the 2024 Article IV consultation, there is a need to fully implement the final components of the Basel III agreement, apply similar regulatory requirements to all banks with US$100 billion or more in assets (including supervisory stress tests), further strengthen supervisory oversight and practices, re-examine the coverage of deposit insurance, and recalibrate bank liquidity requirements and liquidity stress tests. Recent improvements in the clarity of treatment of stablecoins and other crypto-assets are welcome and should serve as a useful basis for future innovation in digital asset markets. Work is underway to develop a regulatory and supervisory framework for such assets and this will need to remain attentive to a range of potential new risks-including to financial integrity-posed by the integration of these digital assets into the existing bank and nonbank financial system.

External Imbalances

Despite the administration's policy efforts, the U.S. current account deficit is expected to remain large in the coming years (at around 3½-4 percent of GDP). The U.S. negative net international investment position (NIIP) is also expected to continue widening due to nonresident inflows into U.S. risk assets and increased external borrowing by the general government. This worsening of the NIIP, alongside a shift in the nonresident investor base toward nonbank private investors, represents a potentially important source of vulnerability. An abrupt shift in portfolio preferences could lead to a disorderly external rebalancing. A substantial fiscal adjustment (discussed above), accompanied by a range of other policies to raise private saving, will be essential to reduce these vulnerabilities. Action by trading partners, to address distortions that contribute to external imbalances, will also be critical.

An Alternative Policy Mix

In staff's view, a different set of policies could better achieve the administration's goals without the negative outward spillovers of the current policy mix while facilitating a more favorable distributional outcome. This alternative policy path would include permanently applying full expensing to all corporate investment, replacing tariffs with a destination-based consumption tax, moving toward a skills-based immigration system with larger authorized immigrant inflows, providing tax incentives for private savings and to defray the cost of childcare, reducing the imbalances in Medicare and social security, eliminating a range of avenues for tax avoidance, increasing the generosity of the earned income tax credit, and better targeting the child tax credit. Together, this combination of policies would increase employment growth and labor force participation, support higher activity, put the public debt on a downward path, lower the trade and current account deficit, and reduce poverty.

The Institutional Framework for Economic Policymaking

The U.S.'s strong institutional framework for economic and regulatory policymaking should be maintained, including by respecting existing institutional protections and fully resourcing the agencies that are responsible for key federal functions (particularly revenue administration, financial oversight, and the provision of economic statistics).