WASHINGTON, June 21 (Agencies): The International Monetary Fund (IMF) said the US economic slump has been shallower than estimated and warned the Federal Reserve may have to raise interest rates "quickly" to contain inflation.
IMF economists, after annual consultations with US officials, raised their forecast for growth next year to 2 per cent from 1.6 per cent. Growth will be "roughly flat" in 2008, the Washington-based agency said in a statement Friday. In April, the IMF predicted a 0.7-per cent contraction in the final quarter of 2008 from 2007.
The fund's assessment echoes Fed Chairman Ben S Bernanke, who said last week the danger of a "substantial downturn" had receded. Investors foresee the Fed raising interest rates later this year to curb inflation as rising food and energy costs hurt consumer spending, the source of more than two-thirds of GDP.
"The slowdown in the US has been less than feared, and a recovery should begin next year as important headwinds are overcome," the IMF said. "A more rapid recovery is clearly possible given the substantial policy stimulus and proactive response of financial markets to repair balance sheets."
The central bank's Federal open market committee next meets June 24-25, when investors expect policy makers will keep the benchmark rate at 2 per cent, after seven reductions since September.
The Fed so far has struck the right balance between supporting growth and guarding against inflation, the fund said.
"Monetary policy settings are now broadly supportive of recovery and a risk-management approach would suggest that policy should be on hold," the fund said, nothing that bond markets are indicating that price expectations are edging up. "Vigilance will be required, given the stimulus in the pipeline and the imperative of keeping inflation expectations well in check."
US consumer prices rose more than forecast in May on record oil prices, and confidence among Americans slumped to the lowest level since Jimmy Carter occupied in the White House. The consumer price index increased 0.6 per cent, the most since November, after a 0.2 per cent gain the previous month.
American consumers anticipate an annual inflation rate of 3.4 per cent in the coming five years, matching the highest level since 1995, a survey showed last week.
The IMF said it expects a "lessening" of inflationary pressures, without providing a timeline. "Thus it could become necessary to withdraw stimulus quickly as the economic recovery gains traction," it said.
Economic growth also may get a boost from about $117 billion in tax rebates that are providing "welcome support to activity at a critical time," the fund said.
The IMF added that pressures on the budget limit the room for future fiscal expansion. If further action becomes necessary "it could most effectively be targeted to the housing and financial sectors at the root of the current problems."
The fund said that any support for the US housing market needed to avoid creating a moral hazard, encouraging people to take risks with the understanding that the government will cover their losses.
IMF economists said they supported action by Congress to encourage voluntary mortgage writedowns and said a Democratic plan to let bankruptcy judges write down mortgage principal "warrants consideration."
Meanwhile, consumers expect housing market weakness to linger for longer than they did a few months ago, a survey showed Friday.
Surveys of Consumers Home Prices Report for June also cited a broad gulf between buyers and sellers in the housing market.
Economists broadly agree that US house prices peaked sometime in 2006. According to some measures, they have fallen about 16 per cent since then.
"Consumers now anticipate that the weakness in home prices will last much longer than they had anticipated a few months ago," wrote Richard Curtin, director of the survey.
"Record numbers of consumers now think there are very attractive prices on homes for sale," Curtin said. "The problem has been that record numbers of consumers have objected to selling their home at such deeply discounted prices."
