IMF warns Trump’s policies could fuel inflation and block rate cuts

The IMF has warned that Trump’s plans to impose higher blanket tariffs by up to 20%, lower taxes, and restrict immigration could lead to higher inflation and prevent Fed interest rate cuts. The fund substantially raised its forecast for U.S. growth in 2025 but cut Eurozone expectations.

The Financial Times reported that the IMF increased the U.S. economy’s growth forecast for 2025 to 2.7%, up from the previous estimate of 2.2%, and 0.1% lower than last year’s estimate. The economic growth forecast put the U.S. ahead of all the other G7 countries. 

Pierre-Olivier Gourinchas, chief economist at the IMF, unveiled forecasts that predicted faster-than-expected growth for the U.S. economy. He added that Trump’s policies could lead to a combination of increased demand and declining supply, possibly reigniting U.S. buying pressures.

IMF warns of Trump’s policy risks and predicts continued U.S. growth

The IMF updated its World Economic Outlook and October forecast, predicting a 2.1% U.S. economy expansion in 2026. The growth estimates unveiled three days before Trump’s inauguration did not include policy proposals from the incoming administration which the fund could not yet integrate in its forecasts. 

Trump’s laid out aggressive plans prompted jitters in bond markets that were cautious about excessive deficits and inflation risks. The IMF’s central forecasts assumed a continued easing of global inflation that would permit further rate cuts in big economies. The FT’s analysis signalled that parts of Trump’s agenda could undermine efforts to curb inflation. 

According to the IMF, proposed U.S. policies such as a looser fiscal policy and deregulation would stimulate demand and increase inflation in the near term. The fund said that while deregulation would boost the U.S. economy over five years by stimulating innovation and removing red tape, dangers of going too far still existed.

“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”.

-Pierre-Olivier Gourinchas, chief economist at IMF

IMF forecasts also highlighted the ‘transatlantic divergence’ between the U.S. and big Eurozone economies like Germany which was expected to grow by just 0.3% this year. The wider Eurozone would grow by 1%, significantly slower than the UK’s 1.6% forecast.

IMF forecasts surge in China’s economy, debt trap risks loom large

Gourinchas emphasized that the Chinese economy was exposed to a ‘debt-deflation-stagnation’ trap if Beijing’s fiscal measures failed to boost demand. He pointed out a scenario where falling prices would boost the real value of debt and undermine activity. China’s economy was expected to grow by 4.6% in 2025, faster than the IMF’s previous expectations. 

The IMF said that the global economy was now expected to expand by 3.3% in 2025 and 2026, slightly higher than October’s estimates but well below its 3.7% historical growth. Headline inflation was also expected to reduce from 4.2% in 2025 to 3.5% in 2026. The fund, however, noted that the taming inflation could be disrupted by the risks of policy generation. 

According to the IMF, the risk of renewed inflationary pressures could prompt raising policy rates and intensifying monetary policy divergence by the central bank. Fiscal, financial, and external risks could be worsened if interest rates remained higher for longer than projected.

Kristalina Georgieva, managing director at the IMF, highlighted the ripple effects of Trump’s uncertain trade policies. She stated that the uncertainty about the incoming administration’s trade policies were adding to worldwide economic headwinds and were actually expressed globally through higher long-term interest rates.

Georgieva noted that despite a decrease in short-term rates, the surge in long-term rates marked a very unusual economic phenomenon. The current scenario, however, painted a picture of economic anxiety where markets and investors braced for potential new trade barriers disruptions.

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