Sources: Rates Data and Economic Calendar—Bloomberg Markets as of 3/23/15; Equity Market, Fixed Income and REIT returns from JP Morgan as of 3/20/15.
FOMC Stays Accommodative, Loses Patience
Last week’s hotly anticipated Federal Open Market Committee (FOMC) meeting and subsequent statement release captured the attention of most market participants. In anticipation of the meeting, investors were focused on whether the word ”patience” would remain as part of the official Fed statement or if the group responsible for setting monetary policy would decide to drop the word and indicate that a higher Fed Funds Rate was around the corner. The word was dropped, however, from the statement and accompanying press conference with Fed Chair Janet Yellen assured investors that, “just because we removed the word ‘patient’ doesn’t mean we’re going to be impatient.” It appears that Yellen and the other members of the FOMC are still looking for labor conditions, beyond the U-3 unemployment rate, to improve before feeling comfortable enough to embark on what likely will be a longer term, albeit moderate, path of increases to the Fed Funds Target Rate.
In addition to this verbal reassurance, the Fed’s outlook for economic conditions appears to support further accommodation. The estimate for change in Real GDP, Core PCE Inflation, PCE Inflation and the Unemployment Rate were mostly lower relative to their December 2014 release as shown in the table below:
We believe this indicates that while the unemployment rate is expected to continue to drop, the lack of consistent wage growth will cause inflation to run below the Fed’s long term target over the short run and will likely constrain overall economic growth.
On the back of this accommodative release, the S&P 500 index increased 2.67% for the week while 10 year U.S. Treasury yields fell from 2.13% the week prior to 1.93%. Utilities, the worst performing sector of the market year-to-date, were the second best performing sector last week with a 4.2% return while REITs, an asset class considered by some to be sensitive to rising interest rates, gained over 5%.
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DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITSs that primarily own and operate income-producing real estate.