updated 10/27/2005 2:19:16 PM ET 2005-10-27T18:19:16

The U.S. economy is on course for a “soft landing” and steady growth of 3.25 percent next year, the OECD said Thursday, but the federal budget deficit and soaring oil prices still pose risks.

“Despite higher energy prices, the expansion has continued at a solid pace, driven by private domestic demand,” the Organization for Economic Cooperation and Development said in a report.

“Although such a soft landing is the most likely outcome, there are some risks,” the report added. “With little economic slack left, inflation could continue to pick up, in particular if oil prices keep rising.”

Failure to keep a lid on public spending or renewed dollar weakness fueled by deficit concerns may “add to inflationary pressures,” the Paris-based economic think tank said.

While praising the U.S. Federal Reserve for steadily raising interest rates from 1 percent to 3.75 percent since last year, the OECD said further increases were needed to contain price pressures.

“The federal funds rate is still low in real terms and remains below most estimates of its neutral level,” the OECD said, referring to the overnight lending rate between U.S. banks.

Rate increases since last year have not been mirrored by a rise in long-term interest rates, the report added, “augmenting the need for further policy moves.”

The deficit in the U.S. current account — the broadest measure of trade — has widened to more than 6.5 percent of gross domestic product from 5 percent early last year, and “a disorderly adjustment” cannot be ruled out, the report said, predicting that the deficit is on course to reach 7 percent by the end of 2006.

“Few other OECD countries have ever managed to sustain imbalances of that magnitude without eventually experiencing sharp downward pressure on the value of their currencies,” it added, and such a sharp dollar decline remains a danger “both to the U.S. and to the wider global economy.”

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