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Investments

What the Janet Yellen pick means for the mortgage market

It doesn’t mean QE infinity, but expect lower rates for now

Federal Reserve

President Obama is expected to officially nominate Janet Yellen, the current vice chair of the Federal Reserve Board of Governors, to the Fed Chair post now occupied by Ben Bernanke in the White House East Room this afternoon.

But what does a Yellen pick mean for the mortgage-backed securities investors who have grown accustomed to not only Fed intervention via quantitative easing and ZIRP, but a constant stimulus in the form of the Fed buying up to $40 billion in MBS each month?

"This was expected," said Paul Miller, managing director with FBR Capital Markets. "It’s a bone to the market, saying we are going to continue to have an easy money supply until this economy starts to pick up steam."

He added, "She is a big supporter of the MBS buying spree, so mortgage rates will go down, not up, with this particular appointment."

As for when a Yellen-led Fed will grant a pullback in QE, that decision is likely to revolve around the unemployment rate.

"I think the timeframe is when the unemployment rate really starts to move in the right direction," Miller added. "They want to see more momentum in the market before they start tapering."

Isaac Boltansky, an analyst with Compass Point Research & Trading, offered his viewpoint Wednesday, saying Yellen’s nomination is not a "seismic shift towards the doves and quantitative easing in perpetuity."

In fact, the Fed Chair still only has one of 12 votes on the Federal Open Market Committee, which determines the trajectory of Fed policy.

Still, Yellen is a predictable force, and one that is likely to reinforce some of the policies adopted by Ben Bernanke – namely a communicative Fed and a more dovish tilt in regards to Fed intervention.

"Our sense is that Yellen is, at her core, a consensus builder," Boltansky said. "While Yellen is decidedly dovish, the simple fact is that the composition of the FOMC will take a slightly hawkish shift in 2014. Two of the more hawkish regional Fed presidents – Plosser and Fisher – will rotate onto the FOMC in 2014."

Boltansky believes Yellen, unlike Larry Summers, will easily be confirmed, despite suggestions that Senate Republicans will raise questions about the Fed’s dependence on QE and its reluctance to steer away from it.  

Still, Compass Point notes that back in 2010, Yellen easily secured the support of the Senate Banking Committee to become vice chair of the Fed.

Ed Mills, also with FBR Capital Markets, believes Yellen will be easily confirmed.

"Democrats are generally unified in their support, following their opposition to Larry Summers," Mills explained. "We expect opposition from a number of Republican Senators related to her support of the Fed's current accommodative monetary policies. However, it will likely be hard to hold up her nomination in the aftermath of current fiscal fights, and we do not see enough opposition to sustain a filibuster."

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