The International Monetary Fund (IMF) on Tuesday downgraded its growth forecasts for the U.S. economy in 2017 and 2018, citing significant policy uncertainties.
While the Donald Trump administration proposed reduction of fiscal deficit and debt, reprioritization of public spending and revamp of the tax system, "it became evident that many details about these plans are still undecided," the IMF said in a statement after concluding the Article IV consultations with U.S. authorities, an annual check-up of economic and financial policies between the IMF and its member countries.
Given these significant policy uncertainties, the IMF decided to remove the assumed fiscal stimulus from its forecasts for the U.S. economy earlier this year and base its new projections on unchanged policies.
"Specifically, it neither builds in the effect of tax reform nor the expenditure reductions proposed in the administration's budget," the IMF said, expecting the U.S. economy to grow 2.1 percent both in 2017 and 2018, down 0.2 and 0.4 percentage points respectively from its previous forecasts in April.
However, significant policy uncertainties imply "larger-than-usual, two-sided risks" to the forecasts, the IMF said.
On the one hand, a medium-term path of fiscal consolidation would result in a growth rate that is below this baseline. On the other hand, spending reductions could be less ambitious and tax reforms could lower federal revenues, providing stimulus to the economy, and raising its near-term growth.
However, the IMF believed the Trump administration is unlikely to accelerate annual U.S. economic growth to sustained 3 percent from 1.6 percent last year, "even with an ideal constellation of pro-growth policies."
"The international experience and U.S. history would suggest that a sustained acceleration in annual growth of more than one percentage points, as projected by the administration, is unlikely," the IMF said.
The IMF also said the Federal Reserve should continue gradually raising interest rates, as the central bank has largely achieved its dual mandate of price stability and maximum employment.
"Alongside the ongoing normalization in policy rates, it is appropriate that the Federal Reserve looks to unwind the post-crisis increase in its holdings of treasury and mortgage backed securities," the IMF said, noting continued clear communication would help the central bank smoothly shrink its balance sheet and avoid undue market volatility.
Earlier this month, the Fed raised the benchmark interest rates for the fourth time since December 2015 and unveiled a plan to trim its balance sheet later this year.