Fed Minutes Validate December Rate Hike: Top 5 Gainers

Minutes of the Federal Reserve’s September 19-20 meeting showed that ‘many’ officials favor a rate hike later this year as the economy continues to expand at a steady clip. Fed officials added that the adverse effects of hurricanes on the economy are likely to be temporary.

The continuation of weak inflation, however, was the dominant topic. Policymakers believed that softening of inflation was mostly due to one-time factors, the effects of which are expected to fade over time. They were confident that the desired inflation target will likely be hit soon. Fed Chair Janet Yellen, in the meanwhile, admitted that inflation remaining below the desired level is a dilemma. She, however, assured that soft inflation doesn’t mean the Fed needs to wait for the price pressure to pick up before raising rates again.

This calls for investing in banks, insurance and brokerage houses as such institutions will see a ramp up in profits on an interest rate hike and stable economic conditions.

Is a December Rate Hike in the Cards?

The Fed panel, which sets U.S. monetary policy, sees possibilities of a hike in December on steady expansion in the economy. The U.S. economy is growing close to the range expected by President Trump and some other Republicans, while both manufacturing and service sectors accelerated at a record pace in September.

A clearer view of last month’s labor market data shows that keeping the effects of the hurricanes aside, the U.S. employment scenario is continuing to tighten. In fact, policymakers believe that the economic effects of hurricanes Harvey, Irma and Maria, which ravaged through U.S. land masses between August and September, were only for the short term. They added that rebuilding has ramped up and economic activity has resumed.

Fed officials also said that business houses “appeared to have become more confident about the economic outlook,” while the Citi Economic Surprise Index improved after hitting multi-year lows in the summer.

At the meeting, the Fed officials left rates untouched at their current range of 1% to 1.25%. Additionally, they forecasted one final rate hike this year as well as three more in the next year. Wall Street is currently pricing an almost 90% chance of a rate hike by the end of the year, per CME Group (NASDAQ:CME) data.

Can Inflation Be a Deterrent?

Persistently weak inflation did raise questions over further rate hikes. However, Kansas City Fed President Esther George said that “low inflation, in itself, is not a problem in an economy that is growing and operating at full employment.”

In fact, most of the Fed officials believe that with jobless rate at a 16-year low, price pressures is likely to build up to the 2% target rate in the medium term. Cost of goods is also likely to increase on an uptick in wage growth. Wages have increased 0.5% to average of $26.55 an hour in September, per the Labor Department data. In fact, in the last 12 months, hourly pay increased 2.9%, up from 2.7% in the prior month and also in line with a post-recession high.

Who Stands to Benefit?

Higher interest rates can boost bank profits as they increase the spread between what banks earn by funding longer-term assets, such as loans, with shorter-term liabilities. The spread between long-term and short-term rates also expands during interest rate hikes because long-term rates tend to rise faster than short-term rates (read more: Zacks Investment Research

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Written By: Zacks Investment Research