OECD WARNS ON US DEFICIT REDUCTION

Paris, November 18- The OECD trimmed its US growth forecast this year, urging the government to use caution in reducing its deficit to preserve recovery.

The US faces high unemployment for two more years, the Organisation for Economic Cooperation and Development estimated in in its twice yearly outlook report.

It also said the US Federal Reserve should maintain its lenient monetary polices, which to date have not aggravated inflation, for the next few years.

The report said that after a spirited turnaround in the second half of 2009, US momentum slowed in the second and third quarters this year and should come to 2.7% for all of 2010, a downward revision to the OECD forecast in May of 3.2%. But it cautioned that 'it is unclear if output growth is yet self-sustaining'.

With the effect of government stimulus measures waning, 'the pace of the recovery is projected to remain moderate in 2011-2012,' the OECD said, forecasting growth of 2.2% next year and 3.1% in 2012.

But it added that if the pace proves to be weaker than expected, the Fed should consider further 'quantitative easing', a process by which the central bank buys US Treasury securities and other assets.

The Fed has begun the purchase of $600 billion worth of such assets in a bid to put more funds in the hands of banks and to thereby lower long-term borrowing rates for businesses. The move has proved to be controversial both in the US and overseas, where it has been condemned as inflationary and is seen as an attempt to weaken the dollar in order to give US exports a competitive advantage.

But the OECD report said monetary policy 'should remain very accommodative for the next few years and be withdrawn only as the economy recovers.'

The OECD noted that the US was confronted with a rapidly expanding federal debt, with the government committed to stabilising debt-to-gross domestic product ratio by 2015. But while 'fiscal authorities need to reduce the deficit, they should do so only gradually to avoid harming recovery,' it added.

The assessment offered scant hope for a significant fall in joblessness any time soon. 'The unemployment rate is likely to come down only slowly and still be far above its pre-recession levels by the end of 2012,' the OECD said. The US jobless rate is forecast to come to 9.7% of the workforce this year, 9.5% next year and 8.7% in 2012.

In the key US housing sector, the OECD report said residential investment was weak and would remain so for some time.

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