The global economy faces a growing risk from big financial market bets that could quickly unravel if investors get spooked by geopolitical tensions or a shift in U.S. interest rate policy, the International Monetary Fund said on Wednesday.
The IMF, an institution based in Washington that is the world's premier watchdog for financial and economic stability, said in a report it still expects economic growth will pick up in the second half of 2014 after a rough start to the year.
But it also warned that financial market indicators suggested investor bets funded with borrowed money looked "excessive" and that markets could quickly deflate if there were surprises in U.S. monetary policy or the conflicts in Ukraine and the Middle East.
As the IMF put it in its technical language, "New downside risks associated with geopolitical tensions and increasing risk taking are arising."
The IMF prepared its report for the Group of 20 meeting of finance ministers and central bankers in Australia this weekend, and just before the U.S. Federal Reserve's regular meeting on Wednesday.
The U.S. central bank renewed its pledge to keep interest rates near zero for a "considerable time" and repeated concerns over slack in the labor market. But some Fed officials have stated publicly that the central bank should be ready to move rates up sooner and faster than financial markets expect given the spate of mostly good news on the U.S. economy.
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