Barclays ups US GDP outlook, sees Fed hike in 2010

NEW YORK, Sept 18 (Reuters) - Barclays Capital raised its outlook on U.S. economic growth for late 2009 and early 2010 in the wake of data showing stronger-than-expected consumer spending and a recovery in the housing sector.

This more optimistic outlook means the Federal Reserve -- the U.S. central bank -- will try to curb inflation sooner than Barclays previously predicted, the investment banking arm of Barclays Plc said in a report.

Barclays' economists said the Fed may start raising the federal funds rate in September 2010 rather than keeping it on hold throughout next year, as they formerly forecast.

"Consumer spending looks stronger than we had thought, while residential investments is rebounding more firmly than expected," Dean Maki, chief economist at Barclays Capital in New York, said in a telephone interview on Friday.

U.S. Gross Domestic Products, the government's measure of economic activity, is now expected to grow at a 4.0 percent annualized rate in the fourth quarter and a 5.0 percent annualized pace in the first quarter, Maki said.

This compared with his earlier forecasts of 3.5 percent in the fourth quarter and 3.0 percent in the first quarter.

The second quarter is expected to be the last quarter of economic contraction, and mark an end to the worst U.S. downturn since the 1930s Great Depression.

Barclays' latest GDP forecasts are more upbeat than the consensus view in a recent Reuters poll of economists. Their median forecast on fourth-quarter U.S. GDP was a 2.4 percent annualized gain, more than 1.5 percentage points below Barclays' latest prediction. For more, see [ID:nLAG003760]

Given the prospects of a sustained recovery, the Fed will become less worried about deflation, or a prolonged period of widespread price declines.

The central bank will shift its policy focus towards withdrawing monetary stimulus to prevent the economy from overheating, according to Barclays.

"We think its views will shift over the next year away from fear of weakness and toward normalization," Maki wrote in a research note released late Thursday.

Maki forecast the Fed would raise the fed funds rate, or overnight cost banks charge each other to borrow excess reserves, to 0.50 percent from the current range of zero to 0.25 percent. By end of 2010, the fed funds rate will increase to 1.00 percent.

Moreover, the Fed will likely reduce excess reserves about middle of 2010 prior to raising rates.

The Federal Open Market Committee, the Fed's policy-setting group, will meet next Tuesday and Wednesday. Analysts, including Barclays' Maki, widely expect it will leave rates unchanged.

(Reporting by Richard Leong; Editing by Andrew Hay)