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Donald Trump’s plans for higher tariffs, lower taxes and curbs on immigration risk reviving inflation and preventing the Federal Reserve from cutting interest rates, the IMF has warned.
Unveiling forecasts that predicted faster-than-expected growth for the US economy, the fund’s chief economist Pierre-Olivier Gourinchas said the president-elect’s policies could lead to a combination of surging demand and shrinking supply which would “likely reignite US price pressures”.
He added in a blog post on Friday that “higher inflation would prevent the Federal Reserve from cutting interest rates and could even require rate hikes that would in turn strengthen the dollar and widen US external deficits”.
Gourinchas also warned that financial deregulation — another Trump priority — could trigger a “boom-bust cycle” if pushed too far.
The IMF increased its 2025 growth forecast for the US economy to 2.7 per cent from its previous estimate of 2.2 per cent, ahead of all other G7 countries and close to last year’s 2.8 per cent.
In an update to its World Economic Outlook, the fund also predicted the US would expand by 2.1 per cent in 2026, 0.1 of a point higher than in its October forecasting round.
The growth estimates, which come just three days ahead of Trump’s inauguration on Monday, do not take account of policy proposals from the incoming administration, which the IMF said it could not yet incorporate in its forecasts.
The president-elect has laid out aggressive plans to impose blanket tariffs of up to 20 per cent on all US imports, implement a crackdown on undocumented immigrants and enact sweeping tax cuts, prompting jitters in bond markets that are wary of inflation risks and excessive deficits.
The fund referred to near-term “upside risks” to the already “robust” US economy, contrasting the strength of America’s performance to other parts of the world where it sees risks of a weaker-than-expected outlook.
The IMF’s central forecasts assume a continued easing of global inflation, permitting further rate cuts in big economies. But the analysis signalled parts of Trump’s agenda could undermine efforts to subdue inflation.
The IMF said higher tariffs or immigration curbs would deliver negative shocks to US supply, adding to price pressures. It added that proposed US policies such as looser fiscal policy and deregulation would stimulate demand and increase inflation in the near term.
The fund said that while deregulation could boost the US economy’s capacity over a half decade by removing red tape and stimulating innovation, there were dangers of going too far.
“There is a risk that excessive deregulation could also weaken financial safeguards and increase financial vulnerabilities, putting the US economy on a dangerous boom-bust path,” Gourinchas said.
The IMF forecasts also highlighted the transatlantic divergence between the US and big Eurozone economies.
The fund predicted that the region’s largest economy, Germany, would grow by just 0.3 per cent this year, after two consecutive years of contracting output.
The wider Eurozone would grow by just 1 per cent this year — substantially slower than the 1.6 per cent forecast for the UK.
China’s economy was now expected to expand by 4.6 per cent this year — faster than the IMF previously expected.
Gourinchas stressed that, should Beijing’s fiscal and monetary measures fail to boost demand, the Chinese economy was exposed to a “debt-deflation-stagnation trap”, where falling prices boost the real value of debt and undermine activity.
The global economy was now expected to grow by 3.3 per cent both this year and next — slightly above the October estimate but well below its historical average of 3.7 per cent, the IMF said. Headline inflation was expected to ease from 4.2 per cent in 2025 to 3.5 per cent in 2026.
But the fund noted the risks of “policy-generated disruptions” to the process of taming inflation. “The risk of renewed inflationary pressures could prompt central banks to raise policy rates and intensify monetary policy divergence,” the IMF said. “Higher-for-even-longer interest rates could worsen fiscal, financial, and external risks.”
Data visualisation by Keith Fray in London
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