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Fannie Mae Downgrades Economic Forecast, Citing Lackluster Growth

declining-pricesRecent economic slowdowns have resulted in Fannie Mae downgrading its original forecast for the number of Fed rate hikes that will occur in 2016, according to the Fannie Mae Economic & Strategic Research Group’s February 2016 Economic and Housing Outlook released Wednesday.

Deteriorating financial conditions and increasing global concerns appear to be hindering economic growth despite a forecasted pickup in consumer spending, a relatively healthy labor market, and residential investment and government spending that is strengthening.

“Slowing economic growth, worsening global financial conditions, and weakening inflation expectations have led us to revise our forecast for fed funds rate hikes to two instead of three this year,” said Fannie Mae Chief Economist Doug Duncan. “We believe that the tightening labor market will further boost wages and help increase consumer spending. Recent survey data reaffirm a relatively healthy jobs market with increased job openings, hires, and quits, as well as decreased layoffs and decent gains in average hourly earnings.”

Reports from the Fed policymakers themselves have been mixed in the last month. While they originally predicted there would be four rate hikes in 2016, some have hinted that number may be fewer. Last week, Fed Chair Janet Yellen told Congress that rate hikes may occur even more gradually than originally expected because of recent economic issues, and she also did not rule out a negative interest rate environment—though she said it was unlikely.

Conversely, the day after Yellen spoke of negative interest rates, New York Fed President Bill Dudley dismissed talk of a possible negative interest rate environment, saying that reports of the economy’s demise were being exaggerated and such fears are not based in real evidence, particularly in a strong housing market.

2-17 Fannie Mae graph“We expect our 2016 theme ‘housing affordability constrains as expansion matures’ to hold true as home price gains are likely to outpace household income growth as the year continues,” Duncan said. “However, the expected increase in home prices should help lift underwater mortgages and create a healthier housing market. Meanwhile, increased household formation, low mortgage rates, and easing credit standards and more access to credit for residential mortgages are positive factors for a continued housing expansion. We expect constraints on single-family homebuilding to ease and builders should be able to increase production at a faster pace this year, while the gain in multifamily construction is expected to be more modest than last year.”

The minutes from the Federal Open Market Committee (FOMC) January meeting released on Wednesday indicated that the Fed is not in panic stage yet.

“The committee is not jumping to any conclusions about the implications of the recent turbulence in financial markets,” said Curt Long, Chief Economist with the National Association of Federal Credit Unions. “Moreover, there is some acknowledgement of the divergence between financial markets and economic data, which has been relatively solid. However, there is some sentiment among the dovish elements of the committee that tangible evidence of inflation is a prerequisite for future rate hikes. That added to the uncertainty resulting from weakness in emerging markets, a strong dollar, and turbulent equity markets underlies NAFCU’s belief that the FOMC will revise down its forecast of four rate hikes in 2016 at its March meeting.”

Click here to view the Fannie Mae Economic & Strategic Research Group’s February 2016 Economic and Housing Outlook.

Click here to see the FOMC minutes from January's meeting, released Wednesday.

About Author: Brian Honea

Brian Honea's writing and editing career spans nearly two decades across many forms of media. He served as sports editor for two suburban newspaper chains in the DFW area and has freelanced for such publications as the Yahoo! Contributor Network, Dallas Home Improvement magazine, and the Dallas Morning News. He has written four non-fiction sports books, the latest of which, The Life of Coach Chuck Curtis, was published by the TCU Press in December 2014. A lifelong Texan, Brian received his master's degree from Amberton University in Garland.

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