High fiscal deficits, public debt pose risks for U.S., global economy: IMF

The U.S.' high fiscal deficits and the ongoing increase in the public debt-to-GDP ratio pose risks for the country and the global economy, according to the International Monetary Fund (IMF).

The financial agency stressed the need for a "frontloaded fiscal adjustment," through revenue and spending measures while redirecting some fiscal savings to programs to alleviate poverty.

"A structural and long‑term solution to address the issues related to the debt ceiling would also be beneficial," the IMF said Wednesday in its Staff Concluding Statement of the 2024 Article IV Mission.

It highlighted the ongoing intensification of trade restrictions, as well as the domestic content provision in various fiscal programs, which create a risk for the U.S. and global economy.

It urged American authorities to unwind obstacles to free trade and instead advised them to support competitiveness through investment in workers and infrastructure.

"Working with international partners to address the core issues that risk undermining the global trade and investment system, including through concerted efforts to strengthen the WTO (World Trade Organization) and ensure a robust and modern multilateral rules‑based system, will be critical," said the statement.

The IMF said the U.S. Federal Reserve should not reduce its monetary policy interest rate until there is clearer evidence that inflation is sustainably returning to its 2% target.

"Clear communication, including forward guidance, will help guide market expectations in line with the Fed's intended policy path," it said.

The agency expects the American economy to expand 2.6% this year and 1.9% next year, after growing 2.5% in 2023.

The Fed's federal funds rate is estimated at 5.1% for 2024 and 4.1% for 2025, after 5.4% last year, which suggests the IMF expects at least one interest rate cut from the Fed this year, and an additional four next year.

The U.S. Treasury Department said Thursday in a statement it "broadly concurs" with the IMF staff's assessment of the American economy, which has proven resilient and continues to see strong growth.

"We have seen a historic and equitable economic recovery since the start of the (Joe) Biden Administration, with an expanding labor force and low unemployment, rising business investment, and a significant decline in inflation," it said.

It said the Fed's restrictive stance of monetary policy has been "clearly communicated" and is putting downward pressure on economic activity and inflation.

"High savings by households and corporates may have mitigated some of the effects of high interest rates, helping sustain strong levels of consumption and investment, as suggested by the staff assessment," it said. "While inflation remains above the 2 percent target, it has eased substantially and, notably, without a significant increase in unemployment."

The Treasury Department noted that economic outlook still remains uncertain, and the American economy faces both upside and downside risks to the growth outlook.

"Reducing rates too soon or by too much could result in a reversal of the progress we have seen on inflation and ultimately require even tighter policy to get inflation back to 2 percent. Similarly, easing policy too late or too little could unduly weaken economic activity and employment. As progress on inflation continues and labor market tightness eases, these risks continue to move into better balance," it explained.

As for fiscal policy, the U.S. agency said that the current fiscal stance is believed to be appropriate and will yield a stronger, more sustainable growth path over the medium term.

"We echo (IMF) staff's concerns about the rise in poverty in 2022 following the expiration of critical pandemic era policies and underscore that addressing this is a key policy priority for the Administration," it said.

The Treasury Department noted that it has been a little over a year since the sudden failure of Silicon Valley Bank and ensuing stress in the banking system, and added that these events highlighted "the need to improve the speed, force, and agility of supervision to align better with the risks, size, and complexity of supervised banks, as appropriate."