Fannie Mae downgrades economic forecast, predicts interest-rate cut

by Ryan Smith18 Jun 2019

Fannie Mae has downgraded its economic forecast for 2019 and 2020 amid heightened economic uncertainty, lending more weight to predictions that the Federal Reserve may cut interest rates this summer.

Fannie Mae’s Economic and Strategic Research (ESR) Group has powered its projections for US economic growth for 2019 and 2020 to 2.1% and 1.5%, respectively. The ESR Group had previously forecast growth of 2.3% for 2019 and 1.8% for 2020.

The group downgraded its prediction due to weakness in business fixed investment and softening global economic conditions, according to Fannie Mae. It also predicted that the Federal Reserve would cut interest rates by 25 basis points at the September meeting of the Federal Open Market Committee – which is later than many market observers think a cut will happen. Last week, traders in futures markets were giving odds of about 20% that the Fed would cut rates at this week’s meeting – and odds of 70% that there would be at least one interest-rate cut by the bank’s July meeting.

The ESR Group also expressed concern about increasing international trade tensions, including US tariffs on China and the Trump administration’s threat to impose tariffs on Mexico. The escalating tension could affect consumer confidence and business investment, the group warned. It could also impact the job market, which reported only 75,000 new nonfarm payroll jobs in May and downward revisions to its March and April numbers.

The group said that housing could provide an economic cushion, with mortgage rates stabilizing and inventory increasing modestly.

“We expect housing to add to growth for the foreseeable future, and our projection of a 1% year-over-year increase in home sales in 2019 remains unchanged,” said Doug Duncan, Fannie Mae senior vice president and chief economist. “Moderating home-price appreciation and attractive mortgage rates continue to support affordability, particularly as home builders are now paying more attention to the entry-level portion of the housing market.”