But if I knew how to manage my portfolio safer and smarter than most hedge fund managers, I could realistically grow my wealth.
The Federal Reserve includes formal economic forecasts in the minutes from its Federal Open Market Committee (FOMC) Meetings
The Federal Reserve typically releases a short press release after its two day FOMC meeting, with a general overview and its decision on interest rates. A month later, they release the actual minutes of the meeting which is much more detailed than the press release. Analysts will often compare the language between two consecutive releases in order to identify changes in the Fed’s perception of the state of the economy and monetary policy.
The Economic Forecast section of the minutes gives the Fed’s forecast for GDP, unemployment, and inflation for the next three years. It also provides the forecast from the previous meeting. The use of forecasts helps provide more granularity than the typical language of the Fed, which is often very general, and tells analysts very little.
The Fed lowered its unemployment forecast slightly downward in the March FOMC meeting
The Fed lowered its forecast range to 7.3%-7.5% from 7.4%-7.7%, in spite of taking down its GDP forecast slightly. The drop could read one of two ways: either (a) the Fed expects growth to pick up and slack in the labor market to drop, or (b) they expect the labor force participation rate to remain depressed, or even fall. The labor force participation rate is at its lowest level since the Carter administration at 63.3%. A low labor force participation rate can actually drive unemployment lower due to the fact that the unemployed give up looking for a job. Since the pool of available labor shrinks, unemployment can fall even though jobs are not being created. Don’t forget that the meeting preceded the March jobs report, which was highly disappointing.
The minutes showed less of a consensus about the appropriate time to end Quantitative Easing (QE) than the December meeting. During the December meeting, it appeared that a consensus was forming that QE would end sometime late this year, and the disagreement was over whether to end it in early Summer or early 2014. The 10 year bond sold off in response, and yields jumped over 2%. This time, the range of opinions went from thinking that QE should end now to the opinion that QE should be increased. Making things more difficult, the Fed adjusted its forecast for GDP upwards, and its forecast for unemployment downward. Given the disappointing March jobs report, it looks like Quantitative Easing is going to last at least through the year.
Effect on the mortgage REITs
The unemployment rate and the labor market is the driving force behind the Fed’s Quantitative Easing program at the moment. The Fed’s forecast for inflation remains subdued and below their targeted 2% rate. Given the lack of inflationary pressures, the Fed feels comfortable keeping Quantitative Easing in place for the foreseeable future. Federal Reserve Chairman Ben Bernake is a student of the Great Depression and is very cognizant of the risks of withdrawing accommodation too early, especially if the Federal Government is also contracting.
What this means for the mortgage REITs, like Annaly (NLY), MFA Financial (MFA) or Redwood Trust (RWT), is that low short-term rates are here to stay, which is good for them in that it reduces their borrowing costs. It also means that mortgage-backed securities will continue to be well-supported which helps prevent mark-to-market losses. Finally, low interest rates do influence prepayment risks, although rates have been low for so long that we are starting to see prepayment burnout, which tends to happen when rates stay in a low range for a long time. Prepayment burnout means that less and less people prepay each time rates return to the low end of the range.
© 2013 Market Realist, Inc.