The policy of the United States on tariffs as ordered by President Donald Trump has increased volatility in the financial markets, according to report of the International Monetary Fund (IMF) released on Tuesday.
The IMF reported titled “Enhancing Resilience amid Uncertainty” that is an edition of the Global Financial Stability Report for April 2025 stressed that risk assets have been sharply repriced since February following a series of tariff announcements by the US. This also accelerated after the US announced high tariff rates in early April.
The US tariff issue has caused more economic uncertainty that was reflected in stock markets getting badly affected.
“Our assessment is that the global financial stability risk has increased significantly due to heightened economic policy uncertainty and rising market volatility,” said IMF Financial Counselor Tobias Adrian.
“The decline in investor confidence that we have seen has triggered recent sell-offs in equity markets. The tightening of global financial conditions is putting downside pressure on economic activity,” he added.
Emphasizing that financial market volatility in stock, foreign exchange, and bond markets has increased significantly, the IMF report stated that the reaction of other countries has further increased the uncertainty.
In the face of such high asset price volatility, the report stated that global financial stability risks have increased significantly, particularly as financial conditions tightened, as have macro-financial downside risks to growth.
“Currently, financial conditions have shifted from being more or less accommodative to being neutral with the potential for further tightening. In conditions of prolonged volatility, financial institutions with high leverage may experience significant stress. Non-bank financial institutions could struggle during market turbulence, potentially impacting the broader financial system. In weaker and poorly managed banks, vulnerabilities could reemerge,” Adrian warned.
Despite the recent turmoil in the markets, valuations in some key segments of the equity and corporate bond markets still remained elevated, according to the IMF report, pointing out that this meant that readjustments in valuations could go further if the outlook worsened.
The report noted that policy uncertainty remains high, increasing the likelihood of a correction in asset prices.
With that scenario, Adrian said that countries should start preparing for potential challenges.
“It is crucial that we prepare for potential challenges ahead, Equipping authorities to manage financial instability effectively. The policy toolkit should encompass measures that ensure market functioning, support prudential supervision and regulation of financial institutions, and provide emergency liquidity and crisis resolution tools,” he said.
“We recommend that financial institutions and regulators allocate resources for identifying risk and mitigating risk, employing stress testing and scenario analysis. Emerging market and developing economies should focus on enhancing their financial markets while maintaining adequate fiscal policy space and international reserves to cushion against geopolitical shocks,” Adrian added.
