Fed Hikes Rate Fourth Time This Year: 6 Solid Insurance Picks
Zacks Investment Research | Dec 19, 2018 08:39PM ET
As widely expected, the Federal Reserve has increased interest rate again this year. This marks the fourth rate hike in 2018. With the latest raise of one-quarter percentage points at the last held FOMC meeting, the interest rate now stands at 2.5%. However, Fed officials now project two raises in 2019, down from the earlier expectation of three hikes.
Major indexes, namely S&P 500, Nasdaq and Dow Jones Industrial Average declined in yesterday’s trading session.
Fed Chairman Jerome Powell stated “we have seen developments that may signal some softening... In early 2018, we saw a rising trajectory for growth. Today, we see growth moderating ahead."
Fed officials now expect two hikes in 2019 to take the interest rate to 2.9%, down from 3.1% as projected in its September FOMC meeting. Also, interest rate for each year has been revised down. For both 2020 and 2021, the rate is now projected to be 3.1%, down from 3.4% expected earlier. The same should be 2.8% over the long haul, down from 3% predicted at the meeting held in September.
The Fed also provided an updated view on unemployment. Fed officials still expect the unemployment rate at 3.7% for 2018 and 3.5% for 2019. However, for 2020, unemployment is expected to increase a bit to 3.8% (up from 3.5% projected at September FOMC meeting) and 3.8% in 2021 (up from 3.7%). Over the longer term, unemployment rate is estimated to be 4.5%.
A spurt in employment shows average increase of 0.17 million in jobs over the past three months. Per U.S. Bureau of Labor Statistics, unemployment rate was 3.7% in November for the third month in a row.
The Fed now estimates GDP to rise 3% in 2018 and 2.3% for 2019. However, these are down from 3.1% and 2.5%, respectively projected in the September meeting. Expectations for 2020 and 2021 remain consistent with September projections of 2% and 1.8%, respectively. Over the longer term, GDP is expected to improve 2.9%, up from 2.8% expected earlier.
Inflation is expected to be about 1.9% in 2019 and remain 2% in 2020 and 2021.
Although an improving rate environment comes as good news for some, for others, it’s just the opposite. While companies can have more at their disposal, borrowers will feel the pinch as they have to pay more interest. Capital intensive industries will have to bear the rising cost of capital. Meanwhile, banks and insurers will continue to be major beneficiaries of a rising rate environment because of their sensitivity to interest rates.
Courtesy of the progressing rate environment, investment income — an important component of insurers’ top line — is also exhibiting an upward trend. This apart, tax rate overhaul, advancing economy, encouraging employment data and stringent underwriting standards infuse investors’ confidence in the stock.
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