Key points from Janet Yellen's confirmation hearing (Part 3 of 3)
Key takeaways from Yellen’s hearing
While not admitting it, Yellen seems to indicate the Fed goofed when it talked about withdrawing accommodation last June and caused the subsequent bond market sell-off. Expect the Fed under Yellen to be more communicative. She will probably try to clear up the confusion over tapering QE. It certainly seems she intends to err on the side of caution, provided there’s no evidence of asset bubbles and inflation is at or below its 2% target rate.
The comment about full employment being in the 5%-to-6% range was interesting as well. We spent many years over the past couple of decades with unemployment under 5%. (It actually got below 4% in 2000.) Does that mean the Fed will start tightening before it ever gets to that level? Perhaps.
On asset bubbles, Yellen doesn’t hold the view that the Fed had a role in inflating the real estate bubble or the stock market bubble. Those bubbles were due to regulatory failure. It’s ironic that the Fed has a problem with “too much money chasing too few goods” (in other words, inflation) but is okay with “too much money chasing too few assets” (in other words, a bubble). This is unsurprising and suggests that the punch bowl might hang around a little longer than expected.
Implications for mortgage REITs
For mortgage REITs like Annaly (NLY) or American Capital Agency (AGNC), this means the Fed will stay accommodative until we see a robust, strong recovery. She acknowledged that the headline unemployment number tells too optimistic a story. For the REITs, it probably means QE will remain, or at least the mortgage-backed security side of it will stay for quite some time. REITs will undoubtedly benefit from a more communicative Fed, which will allow it time to reduce its leverage if it needs to in advance of any changes.
Implications for homebuilders
For builders like Lennar (LEN), KB Home (KBH), and Toll Brothers (TOL), this means the Fed is largely unconcerned about a possible bubble in the real estate market and the Fed wants to see them building more homes. In other words, the Fed will pursue policies that help homebuilders’ business. Mortgage rates should remain low, and the Fed will continue to push economic growth. Strong jobs and strong economic growth are the biggest components of their story.
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