Economist expects Fed to cut rates at least a half-point

WASHINGTON -- David Berson anticipates the Federal Reserve will cut interest rates by a half-percentage point Tuesday, or possibly more. And Fed officials will continue slicing in 2008 as central bankers combat a recession that appears to have started and is likely to end later this year.

Berson, chief economist and strategist at PMI Group, which provides residential mortgage insurance, expects the Fed ultimately will cut its target for rates to 1.5%, the lowest since September 2004. The Fed has cut rates to 3% from 5.25% since September.

It's worth listening to Berson, who went to PMI in October after retiring as chief economist at mortgage investor Fannie Mae. Last year, he was the most accurate forecaster on USA TODAY's panel of prominent economists. He ranked first out of 37 economists who filled out the survey every quarter.

"The odds are that we are in a recession," he says. But "given the extent of monetary-policy easing by the Fed and the size of the (recently enacted) fiscal stimulus package, the downturn will be short and mild, and we'll be out of it in the second half of the year."

Of the economists who were in the top 10 last year, seven say the Fed will cut by three-quarters of a percentage point at its Tuesday meeting. Three say the Fed will slice by a half-percentage point. But, like Berson, all say it's a close call.

Berson notes there are a number of risks to the economy that could make the recession last longer and run deeper. In particular, turmoil in financial markets risks a further contraction in mortgage availability. That could make the housing downturn last longer.

Related Stories

Man dies after setting himself on fire near court

• Apr 20, 9:00 AM

5 people, including at least 2 kids, found dead

• Apr 22, 2:38 PM

OJ Simpson dies at 76

• Apr 11, 6:32 PM

He also doesn't anticipate a significant decline in mortgage rates. Even with the Fed's actions, there are a number of other issues helping prop up rates.

Last week, the rate on a 30-year, fixed mortgage was 6.13%, up from 6.03% in the prior week and on par with the rate a year ago, according to Freddie Mac.

Last year will probably be remembered as the point when the housing boom officially went bust. It appears to have paid off to know housing when it came to forecasting the economy. In addition to Berson, two of the other economists in the top 10 in 2007 work directly in the housing industry.