IMF Hails U.S. Growth but Warns Deficits Put Debt on ‘Stability Risk’ Path

The International Monetary Fund on Wednesday praised the United States for delivering strong growth and easing inflation but warned that large and persistent budget deficits are pushing public debt onto a path it now calls a “growing stability risk” for the U.S. and the world economy.

Strong growth, sticky inflation

In its staff concluding statement for the 2026 Article IV consultation, released Feb. 25, the IMF described the U.S. economy as “buoyant,” driven by robust productivity gains and solid investment. It estimated that real U.S. GDP grew 2.2% in 2025 on a fourth-quarter-over-fourth-quarter basis, roughly in line with prior forecasts despite a late-year federal government shutdown.

The Fund projects growth will pick up to about 2.4% in 2026 and remain at a “healthy pace” into 2027, with unemployment hovering near 4%.

Inflation has proved stickier. The IMF said personal consumption expenditures inflation “moved sideways” around 3% in 2025, as higher tariffs lifted goods prices while services inflation continued to ease. Staff expects core PCE inflation to fall back toward the Federal Reserve’s 2% target by early 2027, assuming no major new shocks.

A sharper fiscal warning

Behind the upbeat near-term outlook, the IMF’s fiscal message has sharpened from its last full assessment of the United States in 2024. The Fund now projects that under current policies the general government deficit will remain in the 7% to 8% of GDP range, pushing total public debt to about 140% of GDP by 2031.

“The story of 2025 has been the remarkable performance of U.S. private sector entrepreneurs and workers,” IMF Managing Director Kristalina Georgieva said at a press briefing in Washington. “At the same time, the fiscal position is on an unsustainable path and is a growing stability risk.”

The statement, issued Feb. 20 at the end of an IMF mission to Washington, is the staff’s preliminary assessment; a more detailed report will go to the IMF Executive Board in the coming weeks.

IMF staff called for a “clear, frontloaded fiscal consolidation plan” to put the debt ratio on a downward path, moving the general government budget to a primary surplus of about 1% of GDP—an adjustment of roughly 4% of GDP versus the current baseline.

The report argues that cutting only nondefense discretionary spending—about 15% of federal outlays—would be insufficient. It says the U.S. will likely need higher federal revenues across several tax bases and structural changes to Social Security and Medicare, alongside measures to protect low-income households.

Readout on Trump’s second-term policy mix

The assessment provides an early, detailed readout on the economic impact of President Donald Trump’s second-term agenda, including broad tariff increases, tighter immigration enforcement, deregulatory initiatives and tax changes enacted last year.

Tax and spending measures passed in 2025—such as more generous treatment of capital income and lower household income taxes—are expected to boost the level of GDP by about 0.75% in 2026 and 2027, the IMF said, while widening the deficit by about 1.5% of GDP in the near term. From 2029, as some tax breaks expire and spending cuts deepen, the overall fiscal stance is expected to turn contractionary and weigh on growth.

Distributional effects

The Fund devoted unusual attention to distributional impacts. It said tax relief on tips and overtime and increases in the child tax credit will support incomes for many working households, but that cuts to Medicaid and food assistance—combined with tariff-driven price increases—are expected to “materially reduce” real disposable income for the bottom third of households and increase the poverty rate.

After 2029, when several progressive income tax provisions are scheduled to expire, the IMF projects the combined effect of fiscal, trade and immigration policies will lower real disposable income for the bottom half of the income distribution.

Tariffs: higher prices, modest drag on growth

The Trump administration has said higher tariffs and tighter immigration are needed to restore fairness in trade, reduce the goods deficit and curb unauthorized migration. In February, the White House announced a “temporary import surcharge,” a broad tariff measure it said was justified by “fundamental international payments problems,” including a current account deficit of about 4% of GDP and a record goods trade gap.

IMF staff estimate recent tariff increases will raise consumer prices and slightly dent growth while generating revenue. The higher tariffs are expected to:

• add about 0.5 percentage point to PCE prices by early 2026,
• reduce the level of output by about 0.5%,
• modestly narrow the trade deficit, and
• raise revenue of roughly 0.75% of GDP in the near term.

Georgieva called the tariffs a “negative supply shock” that adds to goods inflation and weighs on productivity and potential output over time. The IMF reiterated its view that broad tariffs distort resource allocation, disrupt supply chains and undermine the benefits of global trade, and said national-security trade restrictions should be narrow and clearly targeted.

Immigration: smaller labor force, lower output

The IMF also marked a shift on immigration. In 2024, staff said a surge in migrant inflows had expanded the U.S. labor force by nearly 3% over three years, easing supply constraints and helping bring down inflation. In the new statement, it said stricter border enforcement and more removals have “sharply reduced” the inflow of foreign-born workers.

The Fund now projects tighter immigration will slow employment growth, add modest upward pressure on inflation and lower the level of real output by about 0.4% by 2027. It highlighted risks in immigrant-labor-intensive sectors such as agriculture and construction, warning of potential labor shortages, project delays and weaker productivity growth.

Fed policy endorsed; regulation and energy mixed

On monetary policy, the Fund broadly endorsed the Federal Reserve’s actions. The Fed cut its benchmark rate three times in 2025, bringing the effective federal funds rate to about 3.6% as job growth cooled and second-round tariff effects appeared limited.

In the baseline scenario, the IMF said the Fed can gradually ease rates further to 3.25%–3.5% by end-2026 while keeping the inflation-adjusted stance broadly unchanged. Larger cuts, it said, should be reserved for a “material worsening” in labor markets. Georgieva called Fed independence and credibility an “asset” that must be “carefully guarded.”

The Fund’s views on regulation and energy policy were more mixed. It said the administration’s deregulatory push—including a rule requiring repeal of 10 regulations for each new one and efforts to speed energy project approvals—could support dynamism, but the net impact is hard to quantify. The IMF reiterated recommendations to implement remaining components of the Basel III bank-capital framework, apply similar requirements and stress tests to banks with at least $100 billion in assets, and review deposit insurance and liquidity rules.

What comes next

Georgieva said she held “candid” discussions in Washington with Treasury Secretary Scott Bessent and Fed Chair Jerome Powell, and noted IMF recommendations broadly align with Bessent’s stated aspiration to bring the federal deficit down to 3% of GDP over time.

Financial markets have largely taken the IMF assessment in stride, focusing on confirmation of a soft-landing scenario and the prospect of only modest further rate cuts. Some independent economists, however, see greater risks that the combination of tax cuts, tariffs and tighter immigration could push inflation above the IMF’s baseline.

The IMF Executive Board is expected to consider the staff report in coming months and issue its own assessment. For now, the staff’s concluding statement underscores a central tension for Washington: an economy outperforming expectations in the near term—supported by productivity gains and private investment—financed by deficits the Fund warns are unusually large for such prosperous times.