Inflation Pressures Are Easing but Rate Cut Forecast Remains Uncertain

The New Year is beginning where the old one ended -- with uncertainty about when – or whether – the Federal Reserve will begin cutting interest rates.

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After a seemingly endless cascade of dismal economic reports, there is only one shoe left to drop on the battered housing market. Unfortunately, it’s “a pretty heavy shoe,” according to Nicholas Retinas, director of Harvard’s Joint Center for Housing Studies.

Combining two combustible issues is not usually the recommended strategy for shepherding legislation through Congress. But by adding regulatory reform for the Government Services Enterprises) to a bill providing assistance to homeowners facing foreclosure, Sen. Christopher Dodd (D-CT), chairman of the Senate Banking Committee, has managed to secure strong bipartisan support for both.

In a recent speech, Federal Reserve Chairman Ben Bernanke said the financial markets are “stabilizing” but remain “far from normal.” That assessment might also apply generally to the economy, which is hardly “normal,” if your definition of normal includes even moderate growth and a housing market that isn’t on life-support. Whether the economy is stabilizing remains an open question, however, as economists continue to debate whether we are heading into a recession, have already stumbled into one, or still have some hope of avoiding a serious downturn entirely.

The subprime induced financial crisis seems likely to achieve what political pressure, an accounting scandal and withering criticism could not – stronger regulatory oversight of the giant government services enterprises (GSEs), Fannie Mae and Freddie Mac.