World Economic Forum, where Shereen is in conversation with Gita Gopinath, the First Deputy Managing Director at the IMF. Welcome back. We continue our conversations here at Davos 2025. As I've been saying, this is proving to be a Trump Davos. All eyes were on what President Trump had to say in his inaugural speech yesterday, and what the impact and the implications are likely to be for the world economy. Joining us now is the IMF's Gita Gopinath. Gita, it's always a pleasure. Thanks very much for joining us here in Davos. Were you up watching the speech last night?
Shereen, yes, I was up for quite a while, but I have several colleagues of mine who are also following it from Washington DC, so we got the whole coverage. But so far, along expected lines.
And somewhat still on tariffs and how those are going to play out, especially when we talk about China.
Yes, I mean, President Trump said he would hit the ground running on day one, and that's what he has done. And he has made several announcements, some very specific on immigration and on energy, on tariffs. Again, there is intention, but we still have to wait for the details. So I think, again, it's too early to come up with an assessment of what these policies will mean.
Yeah, I would imagine we will need to wait for the details to understand the implications and the impact. But Gita, let's talk about global growth. And you know, you put out, the IMF put out its World Economic Outlook just before Davos, 3.3 for 2025 as well as 2026. And of course, this is below the historical average that we've seen through the 2000s. Do you believe that, you know, the downside risks to that projection are higher today on the back of what we are hearing from the Trump administration?
If we look at the very near term, I would say that there are both upside risks and downside risks, but they apply differently for different countries. So in the case of the US, there was a lot of positive sentiment, there is a lot of anticipation of deregulation, including also on keeping the, making the tax cuts permanent, so that could give a positive boost to the US economy. You know, keeping the other policies in, even if the other policies are implemented on immigration and on trade, so we could see a near-term upside risk to the US economy. But for most other countries in the world, you know, the developments on the trade front, on the policy uncertainty that's there, the higher borrowing costs that we now have, especially at the 10-year end, because the US economy is as strong as it is and inflation remains, you know, something that they have to watch very carefully, the strong dollar, all of that puts more of downside risks on many other countries in the world.
Yeah, you know, let's focus a little bit on the US and what you expect there in terms of both the tax cuts as well as the tariffs and the impact of those. Do you expect the Fed to be able to cut rates in 2025? Because, you know, the expectation was that perhaps one, but now we're starting to hear maybe none. What's your own take on what's likely?
The US economy is strong, the US labor market is stronger than we thought it would be at this time a couple of months ago. So the indicators point to an economy that, even given where interest rates are now, is able to chug along. And therefore, I can see that the Fed will be cautious about any further rate cuts, and they're going to track the data and going to follow the data. And also, the impact of all the new policies that are being announced will matter in terms of what the impact will be on inflation. So I think they are on a wait-and-see mode, the usual data-dependent approach. And yes, compared to last year, even as, you know, middle of last year and so on, where there were expectations of many more rate cuts, this year I think it's gone down to one, and we'll see.
The dollar strength and what that means as far as emerging markets go, and emerging market fund flows. You know, we've seen a little bit of a change overnight on account of the expectations on tariffs and that not being sort of confirmed just yet. But how do you see the bond markets as well as the dollar strength impacting what happens to emerging market fund flows?
This is certainly, we're seeing movements in the bond market in terms of 10-year Treasury yields, more volatility than we had seen in that decade after the GFC and before the pandemic. And a couple of things have changed. One, we are no longer in the world of a global savings glut. You know, there is a lot of public sector debt on the market in the US, public sector debt is also quite sizable, and that is feeding into some of the long-term yields going up, including that right now. I think inflation expectations also are putting some pressure on the long-term rates. So that this space that we're in now, with the expectation that interest rates may stay higher for longer in the US, is certainly spilling over to the rest of the world. An interesting fact is that usually in previous cutting cycles, when the Fed cut rates, you know, rates fall across the whole yield curve. But this time, we've had since September about 100 basis points of rate cuts, and we've had 100 basis points of increases in the 10-year Treasury. That is not typical, and so this is a different time. And it is a reflection of the fiscal stance, it's a reflection of inflation expectations and what it will take to bring, to make sure inflation stays close to target.
You know, the possibility of deregulation across different sectors, that is what President Trump has promised, and the expectation the banking sector also has, the financial sector has for deregulation as well, to do with capital requirements and perhaps more. A conversation that I was having with Kenneth Rogoff here yesterday, and that's one of his concerns, that, you know, that this could perhaps be an undoing. How do you see what is being promised or what is being speculated on as far as deregulation for the financial sector and what that could potentially mean?
Here again, I think we wait to see what the details are. There is something like an optimal level of regulation that's important to balance the risks that can come from a lot of credit in the economy versus the benefits of it. There is a sense in which there may have been a bit of overregulation, and that needs to be pulled back. But at the same time, one of the reasons why we didn't have any kind of a financial crisis despite having a major pandemic and a big energy price move and cost of living crisis and so on is because of the reforms that were put in place to keep the banking sector safe. And so regulation is absolutely important. There has to be the right balance for it, and this, we have to see what exactly this administration will do.
Cryptocurrency and the way that we've seen President Trump back cryptocurrencies, as well as the move that we've seen in the Trump meme coin. What do you make of it, Gita?
