US interest rates to remain unchanged

Resilient US economic growth will keep inflation from fading and persuade Federal Reserve policy makers to leave interest rates unchanged this year, according to a survey by the National Association for Business Economics (NABE).

The forecast, based on the median of 47 estimates, is a shift from the group's November survey in which economists projected the Fed would start cutting rates in the second half of 2007. The central bank will drop its target rate in the first quarter of 2008, according to the recent poll.

Economic growth, still hampered by slowdowns in housing and manufacturing, will gain strength in the second half of the year as the drag from home construction wanes, according to the report. The housing slump is unlikely to slow consumer spending, which is now forecast to be stronger than previously projected.

"The economy is likely to settle into a little below potential growth rate for a good amount of the year, but the expansion is quite healthy and is expected to pick up steam as we move into 2007 and 2008," said Carl Tannenbaum, chief economist at LaSalle Bank in Chicago and a survey participant. "People are still weighted toward inflation as the bigger risk as opposed to a slower pace of growth."

The forecasts are in step with those of the Fed, which has said concerns over the threat of inflation outweigh the risk the economy will soften too much.

"The US economy seems likely to expand at a moderate pace this year and next, with growth strengthening somewhat as the drag from housing diminishes," Fed Chairman Ben S. Bernanke said in congressional testimony last month. It will be some time before we can be confident that underlying inflation is moderating as anticipated."

Economic growth is likely to improve from a 2.5% annual rate this quarter to a 3.1% pace by the last three months of the year, according to the median forecast. The economy is expected to grow 2.7% in 2007, compared with 2.5% in the prior survey, and 3% in 2008.

The so-called core consumer price index, which excludes food and energy costs, will rise 2.3% in both 2007 and 2008, the survey found. Core prices rose 2.6% last year.

If mimicked by the Fed's preferred price gauge, such moderation would still leave inflation at the top of the 1% to 2% range some central bankers' have said is acceptable.

"The Fed is focused on inflation and there are good reasons that they are taking that stance," Joel Naroff, president of Naroff Economic Advisors, said in a note to clients. "Right now, the expectations of 1% to 2% are likely too low" for core inflation.

The Fed voted to hold its rate at 5.25% for a fifth meeting in January, following two years of increases. The NABE survey showed the five highest predictions for the overnight rate this year averaged 5.48%, while the five lowest averaged 4.8%.

The employment rate will average 4.7% this year, little changed from last year's 4.6% average, according to the survey median.

A buoyant labor market will help fuel consumer spending, which accounts for more than two-thirds of the economy. Spending this year is projected to rise 3.2%, the same as in 2006 and up from a 2.8% estimate in the group's last survey.

Home construction will remain the biggest drag on the economy this year, according to economists polled.

Residential investment is expected to drop 15% this year, three times as much as the group projected at the end of last year. The panel also forecast that builders will break ground on 1.6 million new homes this year, unchanged from the previous survey and down from 1.8 million in 2006.

While 2007 will be the low point for housing, the recovery will be "gradual", the report said.

Subprime mortgage lending, or loans made to households with poor credit ratings, was considered the biggest risk to financial markets, according to the survey.

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