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Legendary investor George Soros warned yesterday that the US Federal Reserve's monetary squeeze could hit the economy just as the American housing bubble bursts, triggering a recession in 2007.

Mr Soros said a string of time-bombs could all go off at same time, including a sharp fall in the dollar and a sell-off in the bond markets.


George Soros: ‘I expect a recession to happen in 2007’
The Federal Reserve has raised US interest rates from 1pc to 4.25pc in 13 steps since June 2004, but a monetary time-lag means that the full effect of this tightening will not be clear for months.

Mr Soros expects rates to peak at 4.75pc this spring, high enough to risk an accelerating downturn.

"If housing continues to cool while rates are slowing then it could turn into a hard landing. That's why I expect a recession to happen in 2007," he said.

His concerns are shared by key doves at Federal Reserve, who warned against anti-inflation overkill at the December rate meeting.

Air is clearly starting to leak from the US property bubble after a year of fizzing sales that lifted New York apartment prices by 28pc.

Homebuilders stuck with large inventories are slashing prices for new homes, which fell 4pc last month.

"The boom is obviously winding down, but still to healthy levels" said David Lereah, chief economist for the US National Association of Realtors. He predicted a fall in new home sales of up to 6pc in 2006 as the higher interest rates bite deeper.

Consumers have been cashing the paper gains on their houses to meet their daily bills. Any hint of a property slowdown could, therefore, quickly knock away the key prop underpinning the shopping mall economy.

A Federal Reserve study said home equity withdrawal reached a staggering 7pc of GDP in 2005, with up to 50pc spent on holidays, cars and other forms of consumption.

Bernard Connolly, chief global strategist for Banque AIG, said there was enough liquidity in the system to drive growth until the middle of the year, but then the trouble would start. "There is going to be a recession in 2007 unless the Fed starts cutting rates by the end of the summer," he said.

The root problem was lax monetary policy dating back to the 1990s, leaving an overhang of imbalances.

"When you hold interest rates below normal levels you merely bring spending forward from the future. Well, the future arrives at some point. The housing market is already tipping over," he said.

Dick Berner, chief US economist for Morgan Stanley, said declining energy costs and a fresh burst of business investment would keep the boom going through 2006, with a good chance for a soft landing when it all ends.

"We believe that the long-awaited US slowdown is coming, but not until 2007, and, barring unforeseen shocks, a recession is highly unlikely," he said.

"Housing will turn down in both 2006 and 2007, but the economy will survive. Firming labour markets have lifted wage gains to a 3.7pc annual rate over the past six months. If energy prices merely stabilise, real pay will accelerate," he said.

The optimists may prove right again, just as they were in 2005.

America's M3 broad money supply has been ballooning at an annual rate of 10.4pc during the past six months, while bank credit is up 11pc for the year.

With that much juice in the economy, the greatest danger over the next year could turn out to be an inflationary boom ending in a euphoric blow-off before a bloody 2008.

Gold price soars to 25-year high


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