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)