IMF suggests world economy prepare for shift of U.S. policy

International Monetary Fund's chief economist on Tuesday suggested world economy prepare for shift in U.S. policy and warned of possible rising protectionism following exchange rate fluctuations resulted from the shifting.

"The (U.S. presidential) election marks a shift in the U.S. policy regime with potentially even bigger future effects on prices and activity - abroad, as well as in the United States," said IMF chief economist Maurice Obstfeld in an IMF blog posted on Tuesday.

Following the U.S. election, the U.S. longer-term interest rates, the U.S. dollar and market-based measures of long-term inflation expectations all went up sharply, on the expectation that the new administration would cut tax substantially and boost government spending.

The U.S. Federal Reserve officials also anticipated a steepened rate hikes ahead. According to their economic projections updated in December, Fed officials forecast three rate hikes in 2017, while in their September projections, they expected only two rate hikes.

Although it's still early to know how the U.S. fiscal policy will change, one thing seems clear that it will turn more expansionary through some combination of more spending and lower tax rates, said Obstfeld.

In view of the U.S. low unemployment rate and little slack in the economy, the expansionary policy might push up inflation pressure noticeably, which in turn could result in faster increases in U.S. interest rates, said the chief economist.

According to Obstfeld, the more rapid increases in interest rates and tax incentives for U.S. companies to repatriate their profits held abroad could push up the dollar, while further dollar appreciation could lead to a widening U.S. current account deficit.

Obstfeld also warned of international challenges ahead, saying that emerging market economies with strong dollar-denominated debt could witness reduced liquidity or worsened balance sheets due to the rising U.S. dollar interest rates and domestic currency depreciation.

"If sharp exchange rate shifts and growing global imbalances follow the U.S. policy regime change, protectionist pressures become a major risk," said Obstfeld.

In view of the advanced economies' efforts to revive their manufacturing industry, "it is most likely that emerging market economies are the main targets for higher trade barriers erected by advanced economies," he added. Enditem