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Washington: The US economy is in uncharted waters and the economy is likely to underperform through the middle of next year in the face of a worsening housing and credit crisis, the International Monetary Fund (IMF) said on Wednesday.
With US house prices falling sharply and because recovery from a housing bust is often slow, the IMF said the Federal Reserve should keep interest rates on hold for now, even though inflation concerns are rising.
"Concerns about activity would need to be much more pronounced to justify a more accommodative stance," IMF staff said in a report outlining its consultations with the US Treasury and the Federal Reserve.
"The case for a preemptive hike in policy rates, as markets now anticipate, is... unclear," it added.
The IMF raised its economic growth projections for the US on July 17 to 1.3 per cent in 2008, up from the 0.5 per cent it estimated in April.
It forecast 2009 growth would be 0.8 per cent, up from its prior estimate of 0.6 per cent.
An IMF official said the US economy has been more resilient than expected but still faces difficult times ahead because the housing turmoil weakens household demand and worsens credit conditions.
The IMF said US Treasury officials argued that the flexibility of the US economy and support from strong corporate balance sheets, external demand, and economic stimulus would spur a recovery in the second half of 2008.
The IMF said the dollar's decline has moved the currency closer to medium-term equilibrium, but staff estimated that its value is still somewhat on the strong side.
Using different methodologies, the IMF said the dollar was still overvalued by between 0 per cent to 10 per cent in real effective terms.
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