GDP seen slowing, tying Fed hands on rates

A man shops inside the Lowe's home improvement store in New York February 22, 2010.

NEW YORK (Reuters) - After a growth spurt at the end of 2009, the U.S. economy will slow in the months ahead, keeping the Federal Reserve from raising borrowing costs until the final three months of the year, a Reuters poll showed.

The survey of over 70 economists suggests U.S. gross domestic product will grow at a 2.6 percent annualized rate between January and March, less than half the pace of the fourth quarter of 2009, when it expanded at a 5.9 percent rate.

For all of 2009, the world's biggest economy contracted by 2.4 percent, but the poll predicts it will grow by 2.9 percent in 2010 on an annual basis.

With steady but subdued growth, economists expected the core consumer price index, which strips out volatile food and energy costs, to grow 1.4 percent in the first quarter of the year and to average 1.3 percent over the course of 2010 before edging up to 1.6 percent in 2011.

That suggests the Federal Reserve won't need to raise its benchmark federal funds rate, its main monetary policy tool, until the final three months of the year, a quarter later than predicted in last month's poll.

The Fed funds rate is currently set in a range of zero to 0.25 percent, and the median forecast from respondents see a rise to 0.75 percent between October and December.

"Low inflation is the key to the outlook," said Ethan Harris, head of North America economics at Bank of America Securities-Merrill Lynch. "It allows the Fed to focus exclusively on growth and keep both feet planted firmly on the accelerator."

The Fed has started to unwind some of the emergency measures it adopted during the worst days of the financial crisis. Last month, it raised the discount rate at which banks can access emergency loans.

But officials have said that broader borrowing costs would remain low for an extended period.

After hitting 0.75 percent by year end, economists expect rates to rise relatively slowly, reaching 1.5 percent by mid-2011.

Headline inflation, including food and energy costs, is likely to rise at a 2.5 percent rate in the first quarter and a 2.1 percent rate for the whole of 2010, the survey showed.

(Polling by Bangalore Polling Unit; Editing by Ruth Pitchford)