US Fed should begin to hike interest rates, economy to grow at 2.6% in 2011: OECD

The Federal Reserve should begin to hike interest rates in coming months, the Organization for Economic Cooperation and Development said on Wednesday, as it raised its outlook for US economic growth.

In its semi-annual forecast, the OECD said it sees US economic growth of 2.6 per cent in 2011, up from its forecast last November for growth of just 2.2 per cent. 

The outlook, however, is much lower than the Fed's own "central tendency" estimates, which as of April 27 pegged growth for this year in the 3.1 per cent to 3.3 per cent range. 

Despite what it sees as significant potential downside risks to expansion from higher energy and commodity prices, the OECD recommends the Fed begin slowly withdrawing some of its extraordinary aid to the economy as 2011 progresses. 

"A modest reduction in monetary stimulus should get under way in the second half of this year," the OECD said in its report. 

Alan Detmeister, the OECD Economics Department's US desk officer, said in a press briefing the Fed should raise its benchmark federal funds rate to 1 per cent from the current zero to 0.25 per cent range before the end of the year. 

Continued high levels of unemployment are not enough of a reason to keep rates at rock-bottom lows, the OECD said, since low rates raise the risk of future bubbles or inflationary shocks. The group predicts the US jobless rate, currently at 9 per cent, will remain close to 8 per cent for much of 2012. 

"At present there is little sign that continued extraordinarily loose monetary policy settings have increased inflation expectations more than a small amount or are resulting in another asset price bubble," the OECD added, citing oil and other commodities as a "possible exception." 

The OECD expects the trend of subdued inflation to continue for the foreseeable future, predicting US consumer price inflation of 1.9 per cent for this year and just 1.3 per cent next year -- well beneath the Fed's implicit target of 2 per cent or a bit below. 

The Fed looks set to complete its $600 billion bond-buying program aimed at keeping long-term rates down in June, as scheduled. Its balance sheet now stands at a record $2.74 trillion, but a large amount of bank reserves remain parked at the Fed rather than being lent out to businesses. 


Still, the OECD's call for rate hikes, potentially controversial given a still-fragile US recovery, appears to be based on the presumption that rates are so far below their normal levels that the tightening process must begin soon. 
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