The International Monetary Fund has given its blessing to continued rock-bottom interest rates in the US, saying the Federal Reserve still has time before it needs to making money more expensive.

Strong consumer spending, the IMF says, should combine with business investment to keep the recovery ticking over - albeit nowhere near the 5.6% quarterly growth rate registered between January and March.

But it has also cautioned that US spending needs to fall and tax receipts rise to minimise the risk of severe damage to the economy as the US dollar weakens.

The outlook for the US budget, it warns, "has deteriorated markedly over the past year" as a result of the slowdown, massive tax cuts and a huge increase in federal spending since 11 September.

Pluses and minuses

The IMF's mixed message came a day before the Federal Open Markets Committee meets to decide what should happen to interest rates, becalmed at a 40-year low of 1.75% since December.

Most economists agree that the meeting will leave rates where they are.

With the latest figures released last week - published after the IMF finished compiling its report - consumer confidence and retail sales both weakening, the FOMC will be unwilling to put barriers before business and personal spending by making borrowing more expensive.

The IMF said it was fully aware of that necessity.

The Federal Reserve, it said, "has some room to wait until the recovery is more clearly established before acting, given the minimal signs of impending inflation pressures and the still uncertain economic outlook".

Big spender

But "important uncertainties remain", it warned - not only in consumer and business spending, but more importantly in the US's huge current account deficit, the measure of how much money from outside a country needs to keep its economy functioning.

In the case of the US, that amounts to trillions of dollars a year, and - according to the IMF - requires an encouragement to save, as well as a trimming of public spending.

The original forecast of a 2.5% surplus this year - following the Clinton administration's success in balancing the budget - is long gone, leaving the likelihood of a 1% deficit which could well prove very difficult to reverse.

Finding the cuts elsewhere to feed the massive hike in defence spending will be "difficult to sustain", the IMF said.