by Calculated Risk on 2/07/2007 03:56:00 PM

From Northern Trust: The Fed Probably Thinks It Is On Hold for All of 2007

We don’t. We continue to believe that the Federal Reserve’s next move is to cut the federal funds rate. However, the first interest rate cut now appears likely later in the year, perhaps on August 7, than we had been forecasting in recent months. The trigger for the Fed to decrease the federal funds rate will be the combination of lower inflation and persistent below-potential economic growth.

On housing:

We believe that the bottom of the current housing recession lies quarters ahead. An average post-WWII era housing recession entails about a 25% peak-to-trough decline in real residential investment expenditures. As of the fourth quarter of 2006, these expenditures were down about 13% from their Q3:2005 peak. So, unless this is a milder-than-average housing recession, the trough lies ahead.

And on tighter lending standards:

Click on graph for larger image.

... effective housing affordability is likely to fall as federal and state financial regulators clamp down on “exotic” mortgage products as well as the mortgage market itself. In the past couple of months a number of exotic mortgage lenders and brokers have closed their doors as intermediate buyers/securitizers of this product have pulled back. The Fed’s latest survey of bank lending standards shows a sharp rise in the number of banks tightening their lending standards for residential mortgages (see Chart 2). In other words, credit conditions in the mortgage market are tightening.