Tax cuts and other stimulus under President Donald Trump could lead to broadening fiscal deficits and fuel inflation, requiring a faster pace of interest rate hikes, the International Monetary Fund said Tuesday.
The warning came as the global crisis lender forecast the world's largest economy will grow 2.3 percent this year, and 2.5 percent in 2018, unchanged from the estimates in the January edition of the IMF's World Economic Outlook.
The IMF upgraded its outlook for the global economy this year by a tenth of a point to a sturdy 3.5 percent -- the first upward revision in two years.
The fund also reiterated its warnings about the looming threats of protectionism as voters in slow-growing and increasingly unequal Western economies grow more disenchanted with globalization.
The warnings indicated concerns with much of Trump's pledged economic agenda, including the potential dangers of new trade barriers, excessive deficit spending, overzealous deregulation or unduly strict limits on immigration.
With the US economic recovery ahead of those in Japan and Europe, the Federal Reserve is expected to raise its benchmark interest rate a total of three times in 2017. The first increase came in March.
IMF chief economist Maurice Obstfeld said expansionary fiscal policy could spur the Fed to act even more quickly.
"If the degree of remaining slack in the US economy is small, the result could be inflation and a faster than expected pace of interest rate rises," Obstfeld said in prepared remarks.
This could lead to "sharp dollar appreciation and possible difficulties for emerging and some developing economies -- especially those with dollar pegs or extensive dollar-denominated liabilities."
The IMF predicted as many as five interest rate increases in 2018 and said a stronger dollar could worsen the US trade deficit.
"The associated widening in global imbalances in such a scenario could intensify the demand for trade protection and retaliatory responses," the report said.
- More bank oversight, not less -
The IMF and World Bank are due later this week to convene their semi-annual meetings in Washington, gathering central bankers, and finance ministers from over 180 countries.
As Trump settles into office, his economic policies mostly have yet to take shape. However, US consumer sentiment and global stocks have soared on a wave of optimism, sparked by hopes of a new pro-growth agenda of tax cuts, slashed regulation and infrastructure spending.
But the IMF warned against what it called an "aggressive rollback of financial regulation," which would increase the chances of future financial crises.
Trump has variously pledged to "do a number" or a "major haircut" on the landmark 2010 Dodd-Frank financial reform legislation, enacted in response to the 2008 global financial crisis, to clamp down on excessive risks and other practices that sparked the crisis.
While some deregulation could help local banks, "there is a need to strengthen the regulation and supervision of nonbank financial institutions, particularly as financial activity continues to shift to these less-regulated entities," the report said.
The report likewise said a border adjustment tax, which would favor exports and discourage imports, could be at odds with existing rules under the World Trade Organization.
Trump has made favorable remarks about such a policy, which some Republican lawmakers are promoting.