U.S. economy to underperform through mid-2009: IMF

WASHINGTON (Reuters) - The U.S. economy is in unchartered 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 said on Wednesday.

With U.S. 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 U.S. 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 United States on July 17 to 1.3 percent in 2008, up from the 0.5 percent it estimated in April. It forecast 2009 growth would be 0.8 percent, up from its prior estimate of 0.6 percent.

An IMF official said the U.S. 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 U.S. Treasury officials argued that the flexibility of the U.S. economy and support from strong corporate balance sheets, external demand, and economic stimulus would spur a recovery in the second half of 2008.

DOLLAR SLIGHTLY OVERVALUED

The IMF said the U.S. 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 percent to 10 percent in real effective terms.

"Given the state of our understanding and knowledge I would say it is pretty close to equilibrium," an IMF official told the conference call with reporters.

IMF staff said while U.S. officials did not take a position on the level of the dollar during discussions, they believe the dollar "has moved in line with fundamentals, including interest rate differentials and relative output".

Still, several IMF directors noted that the dollar's depreciation was greater against mostly free-floating currencies like the euro, than against currencies of countries with large current account surpluses, such as China.

The IMF said the expansion of U.S. mortgage guarantee programs could prevent excess home price declines, and IMF officials said they supported legislation passed by Congress aimed at resurrecting the housing market.

The law, signed by U.S. President George W. Bush on Wednesday, launches a $300 billion government initiative to refinance troubled mortgages, and boosts oversight of housing finance providers Fannie Mae (FNM.N) and Freddie Mac (FRE.N), which own or guarantee almost half of the country's $12 trillion in home mortgage debt.

"We strongly support the initiative given the importance of minimizing preventable foreclosures, but we have concerns about the actual take-up of what is being offered," the IMF official said. "The decision of lenders to write down mortgages and modify their terms is voluntary, and the question is, Are there sufficient incentives for lenders to do so?"

The IMF said fiscal stimulus measures to boost the economy were well timed, but any further action should provide temporary support to housing and financial sectors at the root of problems.

In response, some U.S. officials said targeted spending packages could delay an adjustment in housing and asset prices and may be perceived as "bailing out" reckless behavior. Others, however, said in the case of a further downturn there could be a role for some limited measures.

(Editing by Leslie Adler)