The Fed’s adjusted 2016 growth estimates
During the March FOMC meeting, the Fed lowered its estimates for 2016 GDP growth from 2.3%–2.5% to 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 April FOMC minutes, the staff believes that GDP growth has begun to decelerate. Industrial production and manufacturing output declined in February and March. Personal consumption also appears to have slowed. However, some of the data pointed to an acceleration in the coming months. That observation was echoed by FOMC members.
The staff also mentioned that housing has continued its slow recovery. 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’s one sector that could take the economy to the next level, it’s housing. Housing employs a lot of people and thus is a very high economic multiplier.
Implications for mortgage REITs
Mortgage REITs are affected differently by economic strength. Agency REITs such as Annaly Capital Management (NLY) and American Capital Agency (AGNC) tend to react negatively to strength because it telegraphs higher rates. Investors can get exposure to Agency REITs through the iShares 20+ Year Treasury Bond ETF (TLT).
REITs that focus on mortgage origination such as the 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 in the mortgage REIT sector through an ETF can consider the iShares Mortgage Real Estate Capped ETF (REM). Conversely, they can trade the financial sector through the S&P SPDR Financial ETF (XLF).
Next, let’s look see why inflation is still too low for the Fed.