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IMF: World Economy Entering 'Dangerous New Phase'

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The International Monetary Fund says the U.S. economy is struggling to overcome "sluggish" growth due to an unresolved government debt crisis and weaknesses in the housing market and household finances.

In a report released Tuesday, the IMF downgraded its forecast for U.S. economic growth this year to 1.5 percent, one percentage point lower than its previous projection. It says the "first priority" of the U.S. government should be to commit to a "credible fiscal policy" that puts the country's massive public debt on a "sustainable track."  

The report urges the White House and Congress to agree on a "medium-term debt reduction plan" to avoid a sudden collapse of market confidence that could disrupt global economic stability. It also calls for "temporary" government stimulus measures and an "accommodative" monetary policy to encourage private economic activity.

In another report highlighting weakness in the housing market, the U.S. Commerce Department said Tuesday construction of new homes fell more than expected in August.  It says U.S. housing starts declined 5 percent from July, to a seasonally-adjusted annual rate of 571,000 homes.

The IMF also predicted U.S. unemployment will remain above 9 percent next year.  The jobless rate was 9.1 percent in August.  Persistently high unemployment has dampened consumer spending, the biggest part of the U.S. economy.

Analysts expect the U.S. Federal Reserve to announce new measures to try to boost the U.S. economy on Wednesday, at the end of a two-day policy meeting. The central bank opened the meeting Tuesday.

Analysts say the Fed is likely to announce a move to buy long-term U.S. government bonds as a way of pushing down long-term interest rates and encouraging businesses to invest. The U.S. central bank has kept short-term interest rates near zero since 2008.

The analysts do not expect the Fed to repeat its recent purchase of $600 billion in U.S. Treasuries, a "quantitative easing" operation that expired in June. The operation fell short of the Fed's goal of generating self-sustaining economic growth and critics said it risked fueling inflation.

Some information for this report was provided by AP, AFP and Reuters.

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