[ForexNews]

Emerging from the deepest recession since the Great Depression, the U.S. economy remains fraught with uncertainty about the health of the financial system and pockets of weakness outside of housing. In 2010, fiscal and monetary policy stimulus will remain abundant, although the Fed is likely to remove its quantitative and credit easing programs. Growth will continue to be constrained by the deleveraging of household balance sheets and a soft labour market. Real GDP is forecast to expand by just 2.5%, a modest recovery by historical standards. Against this backdrop inflation pressures will remain muted, giving the Fed leeway to keep rates at very low levels until the recovery is more firmly entrenched. Market forecast is that the first rate increase will come late next year with the Funds target ending 2010 at 75 basis points. As the financial system returns to health and the economy starts to generate jobs, the economy is expected to pick up pace. However this will only manage to send the unemployment rate down to 8.9% by the end of that year. The return to trend growth and modest firming in prices will see the Fed begin its program to return the policy rate to a neutral stance. In 2011, this points to a steady drip of rate increases with the funds target forecast to rise to 2.75% by year-end and reach a more neutral setting in early 2012.