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IMF Says Trade Policy Could Damage Current Economic Bright Spots

A new evaluation of the U.S. economy by the International Monetary Fund (IMF) said it’s in a period of accelerated growth, low unemployment and muted inflation.

However, the IMF raised “significant concerns over recent trade policy proposals that could have damaging effects beyond the U.S. economy, trigger retaliatory responses and undermine the open, fair, rules‑based multilateral trading system.”

The report urged U.S. authorities to collaborate “constructively” with their trading partners to get some of these issues settled, without one country solely acting on its own. The IMF also stressed that developments and policy actions in the U.S. “have significant implications for the rest of the world” and encouraged the consideration of that fact as policy decisions are made.

Looking more closely at the condition of the economy, the IMF said the near-term outlook is favorable and that we may see the longest economic expansion in the U.S. economy’s recorded history. It also noted, however, that “heightened policy uncertainty and medium‑term vulnerabilities,” including rising public debt, trade tensions and income inequality, could have an adverse impact on the expansion.

One thing that will support growth and promote structural changes, according to the IMF, is U.S. fiscal strategy and tax reform. At the current stage of the business cycle, the report noted, “the expansionary fiscal policy stance, while boosting U.S. and global output in the near term, could increase risks and uncertainties in the medium term.”

As such, the IMF recommended a rebalanced fiscal policy that relies more on indirect taxes and prioritizes infrastructure spending. What’s more, personal income tax relief should be targeted toward lower income households.

“The net effect of U.S. budget and tax policy choices will exacerbate an already unsustainable upward dynamic in the public debt and leave few budget resources available to invest in a range of urgently needed supply-side reforms, including infrastructure spending,” the IMF said. “It will also contribute to a rise in global imbalances. These risks are added to by recent actions by the U.S. to impose tariffs on imports.”

Apart from policy, the report said a steady rise in wage and price inflation is expected as labor and product markets tighten. The planned increases of the federal deficit could trigger a faster-than-expected rise in inflation, according to the IMF, “that would be accompanied by a more rapid rise in interest rates that could increase market volatility both in the U.S. and abroad.”