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Analysts are raising forecasts for a possible recession as early as the first half of 2023, as the Fed cranks up rates to beat back the worst inflation in four decades. As an interest-rate-sensitive industry worth between 15 and 18 percent of GDP, housing is drawing particular attention as the market begins to show signs of cooling after a blistering pandemic run. Amid rapidly increasing mortgage rates, home sales have slipped and prices are growing more slowly — though the market is a ways off from prices actually falling. MM sat down with Fannie Mae Chief Economist Doug Duncan to pick his brain this week. Here’s some of what he had to say on what’s in store for the economy and housing:

“We’re still of the view that we’re likely to have a mild recession,” Duncan said, pointing to the economic outlooks Fannie published in April and May projecting a modest recession in the second half of 2023.

“Chances are if we’re wrong about the timing, it will be sooner rather than later. We think it might be deeper,” he said. “But we would not declare a recession yet based on what we see.”

On Fed expectations: “One question is whether the Fed leans hard enough to get inflation down and how serious that recession must be,” he said. “It looks to me like they still believe that, whether they use the word or not, a significant amount of this inflation is transitory, because they get to a soft landing with unemployment only rising to 4.1 percent. We just don’t see how that is a non-inflationary environment. It just doesn’t make sense to us.”

Duncan said mortgage rates hitting 6 percent would “do damage to housing” but that he doesn’t expect them to get there: “Would get it there would be if you saw inflation — in spite of the fact that the Fed has been tightening — rise to the 10 percent level that could get you above” 6 percent. “So if the market concludes, ‘they’ve really lost control,’ then I think you can see rates go up further.”

“Clearly, housing is slowing — no shock there,” Duncan said. “Both existing and new home sales are slowing for reasons not related to lack of supply, but rather affordability.” The rate of price growth is slowing, but he doesn’t expect average house prices nationally to fall until 2024 or later.

IT’S FRIDAY! — Kate Davidson will be back on Monday. Send tips to [email protected] or @KateDavidson, or [email protected] or @aubreeeweaver. And you can always reach me at [email protected].

The Labor Department releases the June jobs report at 8:30 a.m. Forecasters expect the U.S. to have added 270,000 jobs — the fewest in over a year — according to Bloomberg.

REPUBLICANS PROD FHFA ON GSE PILOT PROGRAMS — House Republicans are urging newly confirmed Federal Housing Finance Agency Director Sandra Thompson to finalize a rule that would set stricter parameters around the prior approval process for Fannie Mae and Freddie Mac to launch new products. Ten GOP members of the House Financial Services Committee, led by Rep. French Hill (R-Ark.), sent a letter to Thompson on Thursday warning against mission creep at the enterprises as they called on her to finalize the October 2020 proposal. The companies “have a history of venturing into new activities and product offerings that go well beyond their congressionally approved roles,” they wrote in the letter obtained by POLITICO. “Pilot programs should not be operating as back doors for the enterprises to expand into areas already being served by the private sector or to push a housing policy agenda that introduces unacceptable risk to taxpayers.”

FED’S BULLARD SEES CONTINUED ECONOMIC GROWTH — Reuters: “The U.S. economy is expected to continue to grow this year even as the Federal Reserve raises interest rates sharply to bring down unacceptably high inflation, St. Louis Fed President James Bullard said on Thursday. The U.S. central bank’s monetary policy tightening, along with inflation running at more than three times the Fed’s 2 percent target, has stoked fears of a recession, and many economists estimate the most widely cited measure of U.S. economic output, gross domestic product, may have shrunk for a second straight quarter in the April-June period.”

And he’s not the only member of the Fed discussing another rate hike — WSJ’s Nick Timiraos: “A top Federal Reserve official said he would support raising the benchmark interest rate by 0.75 percentage point at the central bank’s July 26-27 meeting as part of an effort to raise rates quickly to levels designed to slow the economy in order to combat high inflation.

“‘Inflation is just too high and doesn’t seem to be coming down,’ said Fed governor Christopher Waller during a webinar on Thursday. ‘We need to move to a much more restrictive setting in terms of interest rates and policy, and we need to do that as quickly as possible.’ Mr. Waller said he expected the Fed would need to raise rates by a half percentage point at the central bank’s meeting in September, which would bring rates to levels designed to deliberately slow the economy.”

MORTGAGE RATES FALL FOR SECOND STRAIGHT WEEK, REFLECTING RECESSION FEARS — WSJ’s Orla McCaffrey: “Mortgage rates recorded their largest decline since 2008 as investors raise their bets that the economy is headed for a downturn. The average rate on a 30-year fixed-rate mortgage fell to 5.30 percent, mortgage-finance giant Freddie Mac said Thursday. That is down from 5.70 percent last week. Mortgage rates haven’t recorded such a big weekly decline since December 2008, when the rate fell from 5.97 percent to 5.53 percent.”

U.S. SMALL BUSINESS PROGRAMS’ FUTURE IS CLOUDED BY CONGRESSIONAL FIGHT — WSJ’s Kate O’Keeffe: “A pair of federal programs meant to help the Pentagon and others tap U.S. small-business innovation face an overhaul or outright extinction as Congress feuds over allegations their funds are being abused by their recipients and by China. The Small Business Innovation Research program and the affiliated Small Business Technology Transfer program are set to expire at the end of September if legislators don’t renew them. Federal agencies have made more than $60 billion in awards through the programs over four decades.

“Sen. Rand Paul of Kentucky, the top Republican on the Senate small-business committee, has pledged to block the programs’ reauthorization unless Congress mandates a revamp. His Democratic counterparts see some of his proposals as counterproductive to fostering innovation, so negotiations are dragging on, according to aides.”

From our Sam Sutton:

CRYPTO EXECUTIVE ORDER — On Thursday, Treasury released a rough sketch of its game plan for how the U.S. would work with international governments on a cohesive regulatory framework for everything from digital asset exchanges to stablecoins — one of President Joe Biden’s top assignments for the department in his crypto executive order. The department’s fact sheet details how the U.S. could engage on digital asset policy through groups like the G-7, G-20 and Financial Stability Board, as well as other standard-setting bodies. One of Treasury’s top goals is ensuring that central bank digital currencies remain consistent with the U.S.’s existing payment networks. “The United States must continue to work with international partners on standards for the development of digital payment architectures and CBDCs … to reduce payment inefficiencies and ensure that any new payment systems are consistent with U.S. values and legal requirements,” according to the fact sheet.

NEW REPORTING — First in Morning Money: With crypto markets buffeted by an ongoing credit crisis, the stablecoin issuer Paxos announced on Friday that it’s updating monthly reports on its reserve assets to include specific, identifying information on the assets that support its dollar-pegged Pax Dollar and Binance USD tokens. The report will include the nine-digit CUSIP code for each financial security the company is holding in its reserves, as well as information on Paxos’s bank deposits and repo agreements.

Stablecoins are largely used to transact crypto on digital exchanges, but as more issuers dive into traditional payments markets, federal agencies have warned that the tokens could eventually grow to become a systemic risk. “One of my biggest fears from a consumer protection perspective is people don’t understand what happens with [stablecoin issuer] bankruptcy,” Paxos Head of Portfolio Management Austin Campbell said in an interview. “They think the stablecoin is worth $1, then a company goes bankrupt. And because it’s like a commingled claim on a balance sheet it turns out to be worth, I don’t know, 60 cents.”

Paxos is regulated by the New York Department of Financial Services – which issued its own set of rules for stablecoin issuers earlier this year. So far, Congress and federal regulators have yet to coalesce on a dedicated rulebook for dollar-pegged stablecoins.

FDIC EYES VOYAGER WSJ’s David Benoit: “Voyager Digital Ltd. marketed its deposit accounts for cryptocurrency purchases as safe, protected by the nation’s banking insurance system in the event of a failure. This week, when the company tumbled into bankruptcy, customers learned they didn’t exactly have the protection they expected and a banking regulator began an inquiry, according to a person familiar with the matter.”

STOCKS GAIN GROUND — AP’s Damian J. Troise and Alex Veiga: “Stocks rallied again on Wall Street Thursday, and the S&P 500 is closing out a fourth straight gain. The 1.5 percent rise marks the longest winning streak for the index since March. Most of the market climbed, and energy-producing companies led the way after oil prices recovered a chunk of their sharp losses from earlier in the week. The bond market is still showing signs of worry about a possible recession, though. A report on Thursday showed more workers filed for unemployment benefits last week than expected. A report on Friday will show more broadly how the jobs market is doing.”

CRYPTO COLLAPSE THREATENS TO LEAVE BLACK, HISPANIC INVESTORS FURTHER BEHIND — Bloomberg’s Paulina Cachero: “Crypto assets that lured investors of color with the promise of quick wealth are now in freefall, threatening to widen existing inequities in financial markets. In a June survey of more than 4,400 adults, about a quarter of Black and Hispanic respondents said they owned or held cryptocurrencies, compared with just 17 percent of their white counterparts, according to a new report from business intelligence firm Morning Consult. That implies a larger proportion of investors of color have been hurt by the crypto rout, which has wiped away $2 trillion in market value since last fall.”

WITH DOLLAR NEARLY EQUAL TO EURO, IMPACT IS BEING FELT — AP’s Paul Wiseman: “The U.S. dollar has been surging so much that it’s nearly equal in value to the euro for the first time in 20 years. That trend, though, threatens to hurt American companies because their goods become more expensive for foreign buyers. If U.S. exports were to weaken as a result, so, too, would the already-slowing U.S. economy.

“Yet there’s a positive side for Americans, too: A stronger buck provides modest relief from runaway inflation because the vast array of goods that are imported to the U.S. — from cars and computers to toys and medical equipment — become less expensive. A strengthened dollar also delivers bargains to American tourists sightseeing in Europe, from Amsterdam to Athens.””

STATE DEBT LEVELS ROSE IN 2021 AT FASTEST PACE IN FIVE YEARS — Bloomberg’s Danielle Moran: “US state debt loads jumped last year as historically low interest rates and a bounty of investor demand led to record sales in the $4 trillion municipal bond market. State tax-supported debt increased 4 percent in fiscal year 2021, the fastest in five years and a departure from recent years’ declining trends as the market favored issuers with low borrowing costs for much of the year, according to an analysis published on Wednesday by S&P Global Ratings.

“About two-thirds of states upped their tax-supported debt loads in 2021, though the bond payments remain manageable, the company said. The median debt-per-capita increased 4.6 percent to $984, still below the peak level of $1,036 in 2012.”


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