The Federal Open Market Committee announced an expected $10 billion cut in its monthly mortgage and Treasury bond buying spree, as it gushed about the strengthening economy and the improving job market. Despite the rosy outlook, the FOMC acknowledged that housing and business investment remain fairly dreary.
The market didn't seem very interested in this particular meeting, and the mortgage REIT sector exhibited some real pep. Annaly Capital Management, (NYSE:NLY), and American Capital Agency (NASDAQ:AGNC) were among those that put in a good showing the day after the FOMC meeting wrapped up, rising by 0.95% and 0.62%, respectively.
The meeting everyone wants to know about
While the monthly FOMC meeting minutes probably won't create a climate of tense anticipation before their release on May 21, the minutes of another meeting that coincided with the FOMC gathering probably will.
On Tuesday morning at 10:30 a.m., the Federal Reserve Board of Governors held a meeting under "expedited procedures". Though transparency laws required the Fed to publicly announce the time of the meeting, the Board decided that the meeting would be closed, as "public interest did not require opening the meeting". The four members present at this special meeting were Fed Chair Janet Yellen, and Board members Daniel Tarullo, Jeremy Stein, and Jerome Powell.
So, what exactly what was discussed at this meeting? Nobody, except the four mentioned above, know the details, but the subject of discussion was "medium-term monetary policy issues." While the Board of Governors holds expedited procedure meetings – the majority of which are closed to the public – fairly often, they generally concern such mundane matters as monetary reports to congress, market briefings, or the discount rates charged by Federal Reserve banks.
Medium-term monetary policy issues, however, are different. As analysts note, such an agenda item usually concerns matters that are more long term, such as planning the resolution of the current quantitative easing program. Such issues could conceivably encompass setting an inflation target – or deciding when to begin raising short-term interest rates.
The latter is of keen interest to mortgage REIT investors, of course. Boosting short-term rates would cause mREITs like Annaly and American Capital Mortgage a world of pain. The increased borrowing costs would compress the interest rate spread between the rates these trusts pay on borrowed money, and the generally higher rates they earn on the mortgage-backed securities they buy with those leveraged funds.
As scary as this scenario may seem, there is little reason to panic. The concept of the "taper" sent markets into a tailspin when it was whispered about last spring, but is now barely newsworthy. After all, mREITs have been through the winding-down of quantitative easing policies twice before.
A change in short-term rates will be huge, but not likely to happen very soon, considering the FOMC's nod to rough spots in the economy. There's no doubt that an increase in rates will affect the mREIT sector, but Annaly has weathered tough times before – and American Capital Agency's management is top-notch, an important factor in the success of any company, but especially so for mREITs.
An eventual rise in the federal funds rate is inevitable, and some details on how the Fed plans to handle that issue should be welcomed by investors. As the experience regarding the taper shows, an informed market is preferable to one wracked with uncertainty.
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Amanda Alix has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.