No Change In The Fed Rate Outlook: 5 Bank Stocks To Buy Now

The widely anticipated interest rate hike was announced by the Fed at the end of the two-day Federal Reserve Open Market Committee (FOMC) meeting yesterday. The federal funds rate, increased third time this year, now stands at 1.50%.

Despite this, the majority of the finance sector stocks ended the day in red, dragging the S&P 500 slightly lower. Also, the S&P 500 Financial and the S&P 500 Bank indexes were down 1.3% and 1.5%, respectively.

Wondering why the stocks were down? Well, investors expected a bit more hawkish stance from the Fed with regards to the pace of rate hike next year and beyond. But the outgoing Fed chair Janet Yellen stuck to the prior estimation of three interest rate increases next year and two in 2019.

While a slew of favorable economic data including continued strengthening of the labor market, increase in household spending, rise in economic activities and better-than-expected GDP numbers in the third quarter support a hawkish stance, the soft inflation numbers seem to be concerning. Unless the inflation target of 2% is not met, chances of any change in the pace of rate hike are less.

In a statement, the Fed said, “…[T]he Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong. Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee's 2 percent objective over the medium term.”

Nonetheless, a big change, likely next year in the form of expected stimulus from the implementation of tax legislation may alter the Fed stance. The massive tax rate cut for U.S. businesses is expected to lead to a further fall in the unemployment rate, driven by the assumption of more job creation.

Additionally, the Fed’s concern related to low inflation will likely diminish as new jobs along with higher wage rate growth is anticipated to lead to a rise in inflation rate to nearly 2%. Given these two favorable factors, there is a chance that the Fed may move the interest rate higher at a faster pace as economic growth improves further.

Therefore banks, one of the biggest beneficiaries of the rise in interest rates, are projected to steadily gain going forward. A steeper yield curve helps them increase revenues. Also, rising rates reflect an improving economy. As the banking industry is largely dependent on the nation’s economy, this further supports profitability.

Bank Stocks Worth Investing Right Now

While it’s not easy to select such stocks from the vast banking sector universe, we have taken the help of Zacks Investment Research

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Written By: Zacks Investment Research