The U.S. economy should perform well this year and in 2007 despite the restraint caused by higher energy prices, the Federal Reserve said in its 2005 annual report issued on Monday.

"So long as energy price increases slow, as is suggested by futures prices, this restraint should diminish as 2006 progresses," the Fed said in the 341-page document.

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It said core inflation "is likely to remain under some upward pressure in the near term" as costlier energy prices work their way through. "But these cost pressures should wane as the year progresses," the Fed said.

The Fed noted that there were "significant risks" to the economic outlook.

"Some of the uncertainty is centered on the prospects for the housing sector," the annual report said. If property prices wane sharply, consumer confidence may suffer and spending will decline, the Fed said.

Additionally, if energy prices do not decline, that would "intensify cost pressures and weigh on economic activity," the Fed cautioned.

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