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December FOMC Statement Cheers Stock Investors

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Highlights of the December 2014 FOMC statement

Yesterday, the Federal Reserve ended its September FOMC (Federal Open Market Committee) meeting. It changed its language regarding interest rate normalization going forward.

The Fed also clarified its stance regarding its balance sheet. For now, the Fed will continue to re-invest maturing Treasuries and MBS (mortgage-backed securities) back into the market. At some point, that will stop. The Fed also said it doesn’t intend to sell its MBS portfolio. It plans to let the portfolio mature.

Bonds sold due to the news. The ten-year bond closed at 2.13. Stocks rallied on the report. The S&P 500 increased above 2010. Stocks took comfort in the statement’s language. The language is still dovish.

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Possible rate hike at the June 2015 FOMC meeting

The above scatter chart shows where the individual FOMC members see the federal funds rate at different periods. If you compare the last chart, after the September FOMC meeting, you will see that the consensus is for a slightly higher federal funds rate at the end of 2015. However, the consensus remains that the Fed will begin hiking the rate at the June 2015 meeting.

The group of members that will make the actual decision next year will be different than the current group. The incoming group is more dovish.

Implications for mortgage REITs

For mortgage REITs—like Annaly Capital (NLY), American Capital Agency (AGNC), MFA Financial (MFA), Hatteras (HTS), and Capstead (CMO)—the news that the Fed intends to hold its MBS portfolio was welcome.

At the margin, that means less pressure on mortgage-backed securities and a lower likelihood of capital losses—especially as rates begin to increase. However, the forecast that short-term rates are going up sooner-than-expected wasn’t good news for the sector.

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