Washington, April 19 (IANS) The International Monetary Fund (IMF) on Wednesday warned that an unexpected rise in the US inflation, resulting from the aggressive fiscal stimulus launched by President Donald Trump, would cause significant global financial tensions forcing central banks around the world to respond firmly.
"Financial vulnerabilities, which have accumulated during years of extremely low rates and volatility, could make the road ahead bumpy and could put growth at risk," the IMF said in its "Global Financial Stability Report" issued twice a year.
The IMF also said that a hike in inflation in the US could lead the Federal Reserve to raise interest rates faster than has been expected to date, Efe reported.
"What we are flagging is that at some point markets see shocks in inflation that raise inflation uncertainty and when that happens, that is associated with a rise in long-term interest rates and that might lead to a tightening in financial conditions," said Tobias Adrian, the director for the IMF's monetary and capital markets department.
The so-called "emerging markets" would be particularly vulnerable to "spillovers" if that happens, the report warned, and Adrian said that central banks could respond to any unforeseen hike in US inflation by reacting more firmly than expected.
Last December, the US Congress approved an aggressive plan of tax cuts for corporations and, to a lesser degree, for the general public, to which shortly thereafter a budget bill that significantly raised defense spending was added.
In addition, the Trump administration is pushing a costly plan of infrastructure investments in Congress.
Economists have warned that this fiscal stimulus could overheat the economy and cause inflation to spike, which would lead the Fed to accelerate its monetary adjustment schedule.
The Fed raised interest rates to between 1.5-1.75 per cent recently and is forecasting two additional hikes this year.
The release of the report coincides with the spring meeting of the IMF and the World Bank this week in Washington, to be attended by the economy ministers and central bank chiefs of the 189 member nations.
