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Why the Fed Lowered Its Forecast for 2016 GDP Growth

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Updated

The Fed’s adjusted 2016 growth estimates 

During the March FOMC meeting, the Fed lowered its estimates for 2016 GDP growth from a range of 2.3%–2.5% to a range of 2.1%–2.3%. The central tendency ticked down from 2.4% to 2.2%.

Notwithstanding the upward revision in December, the Fed has been consistently high on its GDP growth estimates since the Great Recession.

According to the March FOMC minutes, the staff considered the risks to the downside to be greater than the risks to the upside. Global weakness and the inability of monetary and fiscal policy to counteract shocks to the economy drove the revision.

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The Fed also mentioned that housing has continued to recover gradually. Housing has been a disappointment because prices continue to rise, and inventory remains tight, yet builders are still very cautious in spite of sky-high builder sentiment numbers. If there is one sector that could take the economy to the next level, it’s housing. Housing employs a lot of people and, therefore, is a very high economic multiplier.

The consumer seems to be spending a little more, as evident by a rise in light vehicle sales and the higher household net worth numbers as a result of the rally in stock and real estate prices.

Implications for mortgage REITs

Mortgage REITs are affected differently by economic strength. Agency REITs like Annaly Capital Management (NLY) and American Capital Agency (AGNC) tend to react negatively to strength because it telegraphs higher rates. Investors can get exposures to Agency REITs via the iShares 20+ Year Treasury Bond ETF (TLT).

REITs that focus on mortgage origination such as PennyMac Mortgage Investment Trust (PMT) welcome strength, as it helps increase origination activity. Non-agency REITs such as Two Harbors Investment (TWO) benefit from a more benign credit environment. Investors interested in trading the mortgage REIT sector via an ETF can consider the iShares Mortgage Real Estate Capped ETF (REM). Conversely, they can trade the financial sector via the S&P SPDR Financial ETF (XLF).

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