WASHINGTON - The ongoing expansion of trade restrictions and insufficient progress in addressing the vulnerabilities highlighted by the 2023 bank failures both pose important downside risks for the US economy, the International Monetary Fund said Thursday.

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"The ongoing disinflation has taken a relatively light toll on the economy," which IMF staff said has proven itself to be robust, dynamic, and adaptable to changing global conditions, according to a concluding statement in a report after they completed 2024 Article IV Mission to the United States. The annual assessment involves consultations with member countries to evaluate their economic and financial policies.

The ongoing intensification of trade restrictions and the increased use of preferences in the treatment of domestic versus foreign commercial interests represent a growing downside risk for both the US and the global economy. 

IMF staff

Personal Consumption Expenditures, the US Federal Reserve's preferred inflation gauge, peaked at 7.1 percent in mid-2022, the highest level since the early 1980s. PCE inflation was 2.7 percent in April and is expected to return to 2 percent by mid-2025, according to the concluding statement.

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IMF staff, however, noted that there are important upside risks to the outlook for inflation. The expected decline in shelter inflation may materialize more slowly, or reverse more quickly, than expected. Also, even with the sizable expansion in labor supply, nominal wage growth remains relatively high, which could forestall the expected softening of non-shelter services inflation.

An escalation of geopolitical tensions could add to energy costs which would subsequently pass-through to wages and core inflation, IMF staff added.

On fiscal policy, IMF staff argued that the US fiscal deficit is too large, "creating a sustained upward trajectory for the public debt-GDP ratio."

"Such high deficits and debt create a growing risk to the US and global economy, potentially feeding into higher fiscal financing costs and a growing risk to the smooth rollover of maturing obligations," IMF staff said.

While the economy is showing a better overall balance, there are risks ahead to financial stability and from the ongoing increase in trade and subsidy distortions, IMF staff noted.

Financial stability risks have diminished since the time of the 2023 Article IV consultation and some critical financial sector reforms are being implemented, IMF staff said.

However, concrete actions have been lacking in mitigating the banking system vulnerabilities that came to light in 2023 - including failings in bank supervision, the large share of uninsured deposits, and the risks created by the regulatory "tailoring" that was undertaken in 2018, they continued.

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On trade, IMF staff argued that "the ongoing intensification of trade restrictions and the increased use of preferences in the treatment of domestic versus foreign commercial interests represent a growing downside risk for both the US and the global economy."

"Tariffs, nontariff barriers, and domestic content provisions are not the right solutions since they distort trade and investment flows and risk creating a slippery slope that undermines the multilateral trading system, fragments global supply chains, and spurs retaliatory actions by trading partners," they continued.

"These policies are ultimately bad for US growth, productivity, and labor market outcomes and the evidence suggests their costs are largely borne by US consumers and firms," they added.