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Donald Trump’s plans for higher tariffs, lower taxes and immigration restrictions risk reviving inflation and preventing the Federal Reserve from cutting interest rates, the IMF has warned.
Revealing forecasts predicting faster-than-expected growth in the US economy, the fund’s chief economist, Pierre-Olivier Gourinchas, said the president-elect’s policies could lead to a combination of increased demand and reduced supply that would “probably reinvigorate price pressures in the US”.
He added in a blog post on Friday that “higher inflation would prevent the Federal Reserve from cutting interest rates and could even require interest rate hikes which in turn would strengthen the dollar and widen the US external deficit.”
Gourinchas also warned that financial deregulation – another Trump priority – could start a “boom and bust cycle” if pushed too far.
The IMF raised its forecast for US economic growth in 2025 to 2.7 percent from a previous estimate of 2.2 percent, ahead of all other G7 countries and close to last year’s 2.8 percent.
In an update to its World Economic Outlook, the fund also predicted the US would expand by 2.1 percent in 2026, up 0.1 percent from its October forecast round.
The growth estimates, which come just three days before Trump’s inauguration on Monday, do not take into account the new administration’s policy proposals, which the IMF said it could not yet include in its forecasts.
The president-elect has outlined aggressive plans to impose the blanket tariffs up to 20 percent on all US imports, implement a crackdown on undocumented immigrants and enact across-the-board tax cuts, jitters in bond markets wary of the risks of inflation and excessive deficits.
The fund cited short-term “upside risks” to already “strong” the US economycomparing the strength of US performance to other parts of the world where he sees risks of a weaker-than-expected outlook.
IMF central forecasts assume continued easing of global inflation, allowing for further rate cuts in major economies. But the analysis signaled that parts of Trump’s plan could undermine efforts to curb inflation.
The IMF said higher tariffs or immigration restrictions would cause negative supply shocks in the US, adding to price pressures. It added that proposed US policies such as looser fiscal policy and deregulation would boost demand and increase inflation in the short term.
The fund said that while deregulation could increase the capacity of the U.S. economy over half a decade by cutting red tape and spurring innovation, there are dangers in going too far.
“There is a risk that excessive deregulation could also weaken financial safeguards and increase financial vulnerability, putting the U.S. economy on a dangerous boom-and-bust path,” Gourinchas said.
The IMF forecasts also highlighted the transatlantic divergence between the US and the major eurozone economies.
The fund predicted that the region’s largest economy, Germany, would grow by just 0.3 percent this year, after two consecutive years of output cuts.
The wider eurozone would grow by just 1 percent this year – significantly slower than the 1.6 percent forecast for the UK.
China’s economy is expected to expand by 4.6 percent this year – faster than the IMF had previously expected.
Gourinchas stressed that if Beijing’s fiscal and monetary measures fail to boost demand, the Chinese economy it was exposed to the “debt-deflation-stagnation trap,” where a falling price increases the real value of debt and undermines activity.
The global economy is now expected to grow by 3.3 percent both this year and next — slightly above the October estimate but well below the historical average of 3.7 percent, the IMF said. Headline inflation was expected to fall from 4.2 percent in 2025 to 3.5 percent in 2026.
But the fund noted the risks of “policy-induced disruptions” in the process of taming inflation. “The risk of renewed inflationary pressures could prompt central banks to raise interest rates and intensify monetary policy divergence,” the IMF said. “Higher for even longer interest rates could exacerbate fiscal, financial and external risks.”
Data visualization by Keith Fray in London
