Fannie Mae Expects Multiple Fed Rate Cuts

“There is a lot of uncertainty in the economy, in part because of what’s happened in the housing market,” David Berson, Fannie Mae vice president and chief economist said Tuesday at the Lehman Brothers Financial Services conference in New York. But slowing growth, not a recession, is the likely result.

“Home sales are likely to fall further in the second half of 2007 before stabilizing next year,” Berson said. The continuing credit problems that are leading to the downturn in the housing market are likely to prompt the Federal Reserve to cut rates not only at its upcoming Sept. 18 meeting, but also into next year, Berson added.

Berson acknowledges the Fed may not cut rates next week because the core inflation rate is just barely within the Fed’s target rate. Still, he expects the Fed to act later this year and perhaps next year as well.

Housing starts were also likely to continue to fall, Berson said. The Fed recently reported that residential construction had been a drain on the economy for the last six quarters, the longest stretch since 1982.

Home prices are declining as well, Berson said, marking the first decline since 1991. He expects the decline to continue into next year. “Mortgage debt growth will continue to fall this year and into next year,” Berson added.

However, Berson doesn’t expect a recession, but rather continued slow growth.

When the Fed does cut rates, be it next week or later, it will add liquidity to the market. But there will be some lag between the cut and the better liquidity, said Berson, who doesn’t expect the housing market to pick up again until 2009.