The American economy will begin growing again in the third quarter, but the rebound will be meek as a battered housing sector and ailing banks stem any progress in other areas, according to a Reuters poll.

U.S. gross domestic product will shrink an annualized 2 percent in the second quarter, officially making this recession the longest since World War Two. That is deeper than the 1.8 percent predicted in the Reuters poll last month.

GDP will then inch up 0.4 percent in the third quarter, before picking up to 1.6 percent in the fourth in consensus results that are barely changed from a similar sample of economists in last month's poll.

This rather lackluster performance will allow the Federal Reserve to leave benchmark interest rates at the current rock-bottom range of zero to 0.25 percent well into next year even as long-term bond yields have risen rapidly.

Current policy rates look set to remain appropriate for some time to come, said Bruce Kasman, chief economist at JP Morgan.

A separate question put to economists showed that Fed Chairman Ben Bernanke gets a high grade for his handling of the worst financial crisis and downturn since the Great Depression, earning 8 out of a possible 10 marks.

FEW INFLATION WORRIES

Smatterings of improvement in the economic data, along with burgeoning fears of inflation, have prompted several market analysts to begin pricing in some interest rate hikes from the Fed late next year.

Concerns about rising prices looked misplaced for now, although they could perk up over the medium term.

Economists see the consumer price index falling 0.6 percent in 2009 as a whole, but rebounding to near the top of the Fed's 1-2 percent comfort range again late next year.

Indeed, core consumer prices, which exclude food and energy, will not go negative at all, bottoming out at 1.0 percent in the second quarter of 2010 before moving higher again.

Tighter monetary policy will be needed in 2010 to prevent inflation from rising in 2011-12, said Richard Berner, chief U.S. economist at Morgan Stanley.

The U.S. stock market has been rallying for three months now on hopes that the U.S. economy may be past its worst. While that could be true, the Reuters poll results indicate that investors may have gotten ahead of themselves.

Such sentiment seemed to permeate the market on Monday after a weak report on New York state manufacturing and a renewed decline in homebuilder sentiment. Stocks took a tumble, sending major averages over 2 percent lower on the day.

(Reporting by Pedro Nicolaci da Costa; Polling by Bangalore Polling Unit; Editing by Andy Bruce)

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