Fannie, Freddie move fails to upend Fed ideas

By Ros Krasny

CHICAGO (Reuters) - The government takeover of mortgage giants Fannie Mae and Freddie Mac failed to shake the view that a fragile economy will prevent the Federal Reserve from raising benchmark interest rates until far into 2009.

The move to provide federal backing for the country's two biggest mortgage finance companies holds the potential to unfreeze the credit markets and get banks lending again.

On Thursday, San Francisco Fed President Janet Yellen delivered a gloomy economic economy focused on a vicious cycle in the housing and credit markets that threatens to drag down growth -- possibly even forcing the Fed to cut rates again.

Instead, the government's commitment to back the mortgage giants could break that vicious cycle and tilt U.S. growth upwards again, ensuring that the Fed breaks its current policy stalemate with a rate hike, not a cut.

In response to the Fannie and Freddie bailout, home mortgage rates fell sharply on Monday and major U.S. share indices surged as investors bet that the housing sector was in for a shot in the arm.

Over time, "local housing markets will no longer be threatened by a flood of foreclosures and will be able to return to normal functioning," said Andrew Jakabovics, analyst at the Center for American Progress, a Washington-based think-tank.

NO LASTING SOLUTION

But many analysts said while the takeover alleviates the potential for a severe economic shock that seemed to be brewing in recent days, it is not a lasting solution.  Continued...