U.S. growth seen easing into 2008, rate cut in Q1

NEW YORK, Nov 21 (Reuters) - U.S. economic growth is expected to have slowed sharply in the last three months of this year and the Federal Reserve is expected to cut rates by a quarter point in early 2008 and then hold them steady for the next year, a Reuters poll showed on Wednesday.

A prolonged housing slump, high oil prices and renewed tensions in credit markets have pushed up the chance of a recession in the next twelve months to 35 percent from 30 percent in last month's poll.

The survey taken November 15-21 showed gross domestic product growth slowing to an annualised 1.4 percent in the fourth quarter, compared with 1.7 percent in October's poll.

Economists expect GDP to grow 2.3 percent in 2007, up from the 2.2 percent forecast last month. However, they see growth cooling to 2.2 percent in 2008, lower than the 2.4 percent seen last month.

"The housing sector should continue to weigh on the U.S. economy over the coming quarters," said Michael Englund at Action Economics.

"But the ex-housing economy continues to show a remarkable resilience to weakness in housing and we expect this to continue well into 2008," he said.

The growth projections for 2008 were made before the slightly more optimistic forecasts of the Federal Reserve, which on Tuesday released new three-year projections showing it expected growth in 2008 between 1.8 percent and 2.5 percent. This was sharply down from the 2.5 percent to 2.75 percent forecast in June.

"Renewed stress in capital markets and the surge higher in oil prices underscore downside growth risks," said Ethan Harris, chief economist at Lehman Brothers.

Since September the Fed has cut its benchmark federal funds rate by a cumulative 75 basis points to 4.5 percent to limit the fallout from financial turmoil stemming from losses in the U.S. mortgage market.

Median forecasts for fed funds are for a quarter percentage point cut in the first quarter of 2008 quarter and then holding at 4.25 percent until the first quarter of 2009.

Interest rate futures showed a 92 percent chance that the Fed will cut interest rates by a quarter point to 4.25 percent on December 11. That was up from as low as 70 percent earlier in the day.

Analysts are less certain than markets about the outlook for rates. Thirty-six of 81 predict a rate cut in December, with the other 45 forecasting no change .

Meanwhile, the outlook for inflation looks benign.

Core inflation, as measured by the consumer price index excluding food and energy costs, was forecast at 2.3 percent this year and falling to 2.1 percent in 2008.

The Fed forecast the price index for core personal consumption expenditures at 1.8 to 1.9 percent in 2007 and 1.7 to 1.9 percent in 2008.