IMF says sluggish U.S. growth requires easy money policy

Reuters

WASHINGTON (Reuters) - The U.S. economy is recovering at such a sluggish pace that the Federal Reserve needs to keep an easy monetary policy in place while the government comes to grip with its debts, the International Monetary Fund said on Monday.

"A credible strategy to stabilize public debt in the medium term, and a down payment on fiscal consolidation in 2011, are urgently needed," the IMF said in its World Economic Outlook.

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The global lender sees U.S. economic growth at 2.8 percent in 2011 and 2.9 percent in 2012. The 2011 rate is revised down from 3 percent growth the IMF forecast in January, but 2012's forecast was revised up from 2.7 percent.

The IMF stressed that risks to its forecast abounded, including a spike in oil and commodity prices, Mideast and North African political unrest, and debt problems in Europe.

"Renewed financial turmoil in the euro area could substantially tighten financial conditions and weaken global demand," the IMF said.

"On the domestic front, house prices could decline by more than expected, given the large shadow inventory of distressed properties, with adverse effects on household and financial balance sheets."

The IMF noted there still was substantial slack in the U.S. economy and it called hiring "lackluster." It said those conditions suggested inflation would stay subdued and called for keeping interest rates low to try to spur a more vigorous recovery.

"The right policy mix for the United States is one of continued monetary accommodation alongside moves to put fiscal balances on a stronger footing," the IMF said.

The U.S. Federal Reserve has held overnight rates near zero since December 2008 and is on course to complete a $600 billion bond-buying program by the end of June. At the same time, the Congress and the White House are struggling to come to terms over a plan to curb record budget gaps.

It noted that the U.S. budget deficit in 2011 is expected to hit 10.75 percent of national output, the highest among the developed nations, and suggested that casts a shadow across its ability to meet its G20 commitments.

"The United States remains committed to meeting the G20 target of halving the deficit between 2010 and 2013, but the high deficit this year may make this difficult," the IMF said.

CANADIAN 2011 GROWTH FORECAST CUT

In the case of the U.S.'s northern neighbor, Canada, the IMF revised down its 2011 growth estimate to 2.8 percent from January's 2.9 percent forecast but foresaw 2012 growth of 2.6 percent instead of the 2.3 percent it thought earlier.

It said the strength of Canada's currency, known as the loonie, was a drawback for the country's growth prospects. The key risks Canada faces otherwise are from a possible deterioration in strong housing markets and hefty levels of household debt.

Canada is currently in the midst of a general election campaign. The IMF noted Canada has followed sound regulatory policies that helped it escape the worst of the 2007-2009 financial crisis and urged "continued vigilance" in maintaining financial stability.

It praised Canadian authorities for having proposed "a sound and credible plan to return to budget surpluses beginning in fiscal year 2015" but cautioned that an aging population and rising health care costs will require more effort to keep the country's finances stable. (Reporting by Glenn Somerville, editing by Neil Stempleman)

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