US economic growth is likely to slow in the second half this year but inflation risks may prompt at least one more rate hike as the Federal Reserve nears the end of a two-year tightening campaign, a Reuters poll shows.
Median forecasts in last week's survey of over 50 economists, gathered or reconfirmed after higher-than-expected inflation data on Wednesday, still showed the Federal Reserve holding rates steady at 5.0 percent at its June 28-29 meeting.
However, many economists look for the Fed to make at least one more rate increase in 2006; after June the Federal Open Market Committee has four more meetings this year.
The US central bank was widely expected to make a pause its program of interest rate hikes in June, but a big rise in core consumer inflation in April, which came in at 0.3 percent for a second straight month, cast some doubt on that view.
"Prior to Wednesday's data we viewed the probability of a June pause as close to 80 percent or 90 percent ... the probabilities are much more finely balanced now," said Neal Soss, chief economist at Credit Suisse.
Short-term rate futures on Friday tipped the chances solidly in favour of a Fed move to 5.25 percent in June, which would be the 17th in a tightening program that started in June 2004.
Looking ahead, the survey showed 26 economists saw rates at 5.0 percent at the end of 2006, 22 at 5.25 percent or higher and five at 4.75 percent or lower.
"Good growth but faster inflation means 5 percent rates. Inflation will keep rates at that level. Any cut would lead to even higher inflation so will be resisted," said Trevor Williams, economist at Lloyds TSB in London.
The Federal Reserve will also have to weigh up the outlook for economic growth in its interest rate decisions and a likely slowdown in consumer spending as high energy prices weigh.
Median forecasts showed growth easing to 3.2 percent in the second quarter slipping further to a slower but still robust pace of 3.1 percent in the third quarter and to 2.9 percent in the fourth quarter.
In contrast, GDP growth came in at 4.8 percent in the first quarter and is expected to be revised higher based on unexpectedly strong exports reported last week.
"We are becoming somewhat more concerned about energy prices reaching a level that causes consumers to pull back more than they have in recent years," said Soss.
The poll showed US gross domestic product (GDP) growth averaging 3.5 percent in 2006, before slowing to 2.9 percent in 2007.
Mid-point forecasts also showed core CPI rising by 2.3 percent this year and again in 2007, up from a forecast of 2.2 percent in last month's poll.
Core CPI, excluding food and energy, was forecast to rise to 2.5 percent in the third quarter.
Some felt the inflation outlook thwarted prospects for a speedy end to Fed rate hikes. "We expect moderate pass-through of commodity prices and wages into core inflation which stands to creep up to 2.6 percent," said Ethan Harris, chief US economist at Lehman Brothers, forecasting the Fed would raise rates to 5.5 percent by the third quarter.
Others noted that in past cycles the central bank has sometimes stopped raising rates even while inflation - a lagging indicator - had yet to peak.
Analysts also had mixed views on whether the weak US dollar would tilt Fed policy. "The dollar's decline is adding to inflationary pressures and could under less likely circumstances undermine US stock and bond markets," sadi Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pennsylvania.
Still, the majority said the currency factor did not make a Fed pause less likely.
The dollar's decline "has been long expected and will be welcome news at the Fed in working towards a reduction of the current account deficit," said Elisabeth Denison, economist at Dresdner Kleinwort Wasserstein in New York.