Fannie Mae announced it is forecasting strong economic growth with 2.7% real gross domestic product growth in 2018, unchanged from its previous forecast.

Long-term Treasury yields are hitting multi-year highs in February and equities are experiencing a sudden repricing, bringing downside risks to the forecast, particularly if the recent stock market declines are sustained and prove contagious to other markets, the Fannie Mae Economic and Strategic Research Group’s February 2018 Economic and Housing Outlook points out.

“Fiscal Policy and the Fed: Stimulus/Response – our 2018 theme – will be paramount in the months ahead as the economy navigates newfound turbulence and heightened inflationary concerns,” Fannie Mae Chief Economist Doug Duncan said. “While our 2018 growth forecast remains unchanged, upside and downside risks are emerging that are contingent on those policy influences.”

The company explained strength in economic fundamentals continues to support the current forecast, including recent momentum in domestic demand and a historically healthy labor market.

Consumer spending surged in the fourth quarter due to unsustainably strong replacement demand for vehicles damaged by the hurricanes, according to the report. Once that demand dies off, spending growth should moderate in coming quarters but remain the primary driver of headline growth, in part due to increased disposable income from the tax cut.

The GSE predicts recently passed tax reform will create strong growth in capital expenditures throughout the year.

“Legislatively, stimulus from tax reform and the recently passed budget could add to growth,” Duncan said. “However, if additional growth is accompanied by signs – or even fears – of inflationary pressure, it could complicate the Fed’s attempt at a ‘soft landing’ and may require more aggressive monetary action.”

And Fannie Mae says the first rate hike of 2018 will occur at the March Fed meeting, a move fully priced in by the market.

“On housing, we upped this year’s 30-year fixed mortgage rate forecast by 30 basis points to an average of 4.4% during the fourth quarter as a result of the unexpected spike in long-term interest rates at the start of the year,” Duncan said.

“However, we don’t expect rates to play much of a role in total home sales, especially with anticipated stronger disposable household income growth,” he said. “The ongoing inventory shortages should continue to constrain sales despite otherwise ripe home buying conditions.”

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