Will the Fed have to combat a declining housing market?

Housing Market's Drag on U.S. Economy May Let Fed Stay on Hold

"The faltering U.S. housing market will be more of a drag on growth than economists expected a month ago, allowing Federal Reserve policy makers to hold interest rates steady through the first half of next year, according to a monthly survey by Bloomberg News.

Gross domestic product, the sum of all goods and services produced in the country, will expand at an average annual rate of 2.8 percent this quarter and slow to 2.6 percent in the final three months of 2006, according to the median forecast of 81 economists surveyed Sept. 1 through Sept. 7. The fourth quarter estimate is a 10th of a percentage point lower than the prior survey. Growth averaged 4.3 percent in the first half.

Flagging home sales resulting from higher mortgage rates will remove a source of cash that helped drive consumer spending and economic growth during the five-year housing boom, economists said. The Fed's monthly regional survey showed consumer spending last month rose 'slowly' and growth faded in some areas, strengthening the case for holding rates steady.

The housing market is declining `a little more quickly than we had expected at the beginning of the year,' said Scott Anderson, an economist at Wells Fargo & Co. in Minneapolis. `It's not signaling a recession, but we do see a growth slowdown ahead.' "