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It seems all but assured that Janet Yellen, current vice-chair of the Federal Reserve, will be confirmed as the next chair of that powerful entity, replacing outgoing Chairman Ben Bernanke. As the media spotlights her vast experience and closely held beliefs, it has become clear to me that Yellen has all the attributes of the type of leader that will be a true friend of the mortgage REIT sector. Here are a few reasons why.
She's a believer in quantitative easing
Yellen has been called a dove, but a true description of her economic convictions goes much deeper. She is well known for her prescient views on the financial landscape and has a better track record than any other Fed member when it comes to predicting economic trends -- including recognizing the coming recession as far back as December 2007.
She is a firm believer in quantitative easing and broached the subject of the necessity of QE3 a full two years ago. When others have wanted to move away from QE3, she has maintained the need to soldier on. She recognizes that, unlike the post-recession years before the crisis, the economy isn't recovering at the same pace. Housing is still very wobbly, and consumer confidence isn't returning with the same gusto as it has in the past. Knowing these indicators must improve before a stable economy is assured, she will press on with QE3 as long as she deems necessary.
Jobs, jobs, jobs
With the unemployment rate hovering around 7.3%, Yellen has made it clear that getting people back to work is an important goal of QE3, and she has even noted that a dip in the unemployment rate must be associated with stronger economic indicators in order to be considered a true reflection of the employment picture. Her assertive pro-employment stance has become embedded in the Fed's policy, and it seems unlikely that tapering will begin before the unemployment rate drops lower, and economic growth increases.
She's a great communicator
The Fed has been trying to be more transparent, but markets still are easily spooked every time tapering is discussed. While Bernanke's Fed has made a huge effort to keep markets apprised of the Federal Open Market Committee discussions and plans for QE3, expect even more openness if and when Yellen takes the helm.
It was she, after all, who spoke out in early March, calming market upheaval after some speculation regarding a QE3 taper in February. Despite the outspokenness of some FOMC members in favor of a bond purchase slowdown, Yellen made it clear that the program would continue until the economy showed more muscle.
What this means for mREITs
This scenario bodes very well for mortgage REITs, particularly Annaly Capital (NYSE: NLY ) , American Capital Agency (NASDAQ: AGNC ) , and Armour Residential (NYSE: ARR ) , all of which indulge in the same Fannie- and Freddie-backed securities being purchased by the Fed.
In the short term, investors can expect to see QE3 hang around for a while, especially after the economic damage from the government shutdown has been factored in. This means that agency mREITs should be able to regain some of their lost value and will have time to plan ahead for the eventual taper.
In the longer term, more communication regarding the Fed's exit from quantitative easing should help avoid some of the panic that has been seen in the mREIT sector this year. Notably, most of the damage to these trusts has been because of the market's misreading of the Fed's intent, not as an actual reaction to bond tapering.
If confirmed, Yellen won't take her new seat until February 1, 2014. During the lame duck session, though, I expect her point of view will begin to infiltrate the Fed more strongly than before -- and with Bernanke's blessing. Once Yellen gets the nod, it looks likely that mREIT investors will finally be able to face the taper with much less fear.
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