OECD concerned about US high deficit and trade imbalance

The US economy is set to grow by a robust 3.6 percent in 2006, but the Federal Reserve should increase interest rates, the Organisation for Economic Co-operation and Development (OECD)said as it issued a stern warning about high deficits, deep trade imbalances and low savings.

The Paris based OECD said in its twice-yearly review of the world economy. "Monetary policy, currently near neutral, needs to tighten slightly to keep the economy in balance," the OECD said Tuesday. The report described current account imbalances in the US -- which the OECD predicted could reach 7.5 perent of GDP in 2007 -- as "unsustainable," adding that "most observers agree that ... a rebalancing looks increasingly unavoidable."

Such a correction could entail a further depreciation of the already weakened dollar, on the order of one-third to one-half, the report said, citing experts.

Short-term interest rate for 2006 of would settle at 5.1, remaining steady in 2007, the OECD forecast. The current fed funds rate is 5.0 after three quarter-point increases this year, and eight quarter point increases in 2005.

The projection for the US economy's real GDP growth in 2006 was 3.6 percent, up from its forecast six months ago of 3.5 percent. Growth in 2007 should taper off to 3.1 percent, the report says.

The OECD forecasts were based on oil prices stabilizing around 70 dollars per barrel. Light sweet crude for July delivery closed at 69.96 dollars per barrel in the United States on Monday.

The OECD said of the US economy that "profitability is high, business confidence is strong and job creation robust," adding that unemployment had come down to near structural levels.

But it also noted that real growth has lagged behind productivity.

The "vast majority of wage earners," the report said, have seen their purchasing power actually decline, with most gains in wealth coming from the housing and stock market.