Fed may keep raising rates to tame US inflation - IMF

The Federal Reserve may be forced to raise interest rates even higher to keep inflation under control, putting the brakes on already slowing US growth, IMF chief economist Raghuram Rajan said.
The US housing market is in the midst of a marked slowdown and looks set to lose even more steam next year, cooling the world's largest economy and its trading partners, he said.
"It is clear that even as the (US) economy slows, inflationary pressures are rising. If these become entrenched in expectations, the Fed will have to raise interest rates even higher and for longer," Rajan told a news conference.
"So the Fed may soon be on the horns of a dilemma and monetary policy will need to be skillfully managed if the economy is not to be gored," added the IMF economist, who steps down next year to return to the University of Chicago.
The US core consumer price index rose at an annualized 3.5 pct over May-July, its fastest pace since mid-1995, as sky-high energy prices belatedly fed through into the wider economy.
Investors are nervous about the risk of further US monetary policy tightening after the Fed last month left its headline interest rate steady at 5.25 pct following 17 consecutive hikes.
In its twice-yearly World Economic Outlook, the IMF forecast that US growth would reach 3.4 pct this year before easing to 2.9 pct in 2007.
"The forecast housing slowdown is well and truly here with house price appreciation close to zero," Rajan said.
"Rising inventories of unsold houses suggest things will get worse before they get better, though rapidly slowing housing construction suggests that the supply side is also responding appropriately."
However, the housing slowdown has yet to translate into significantly lower consumption, helped by robust labour income and lower gasoline prices, he said.
The world economy also remains strong with growth of 5.1 pct expected this year, slowing slightly to 4.9 pct in 2007, the IMF said, raising its forecasts for both years by about a quarter point.
"This is the fourth year of very strong global growth which has been maintained in the face of headwinds such as strong commodity prices," Rajan said.
But he added: "This strong central forecast is surrounded by more uncertainty than usual, with risks tilted to the downside," including a US slowdown, inflation and the danger of a dollar slump, he said.