Economy

Fannie Mae Lowers Fed Rate Hike Expectations for 2016

Jon C. Ogg

Published: February 17, 2016 10:20 am

Last Updated: January 13, 2020 1:05 pm

Fannie Mae may have a reason to care about economic trends. Despite all the political wrangling over defunding the government sponsored entity (GSE), Fannie Mae (and rival Freddie Mac) funds much of the public mortgage market.

Now we have Fannie Mae dialing down its economic expectations for 2016. Perhaps most important — something that may be music to the ears of the equity and bond markets — is that Fannie Mae is now only predicting two Federal Reserve rate hikes on fed funds in 2016. Their prior forecast had been three hikes in 2016.

Fannie Mae’s updated outlook signals that economic growth appears to have slowed in late 2015 and at the start of 2016. The outlook even notes that this may foreshadow another year of potentially unspectacular economic growth.

Fannie Mae’s Economic & Strategic Research Group’s February 2016 Economic and Housing Outlook forecast a pickup in consumer spending, a relatively healthy labor market and strengthening residential investment and government spending. Still, the group noted that economic growth is being hurt by deteriorating financial conditions and increasing global concerns. Also cited as drags on the economy are the strong dollar and the sluggish global economy hurting manufacturing and net exports.

Fannie Mae Chief Economist Doug Duncan said:

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. 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.

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. 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.