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Investors had a tough time making up their minds about Fed Minutes on Wednesday. Initially, concerns about a lack of broad-based wage growth allayed ongoing fears that rising inflation would end the markets’ rally. However, things turned around completely during the last 45 minutes of the trading day following a spike in bond yields.
Overall, the Fed’s latest report indicates that an increase in economic growth and an uptrend in inflation is reason enough for the central bank to keep raising rates. This was the one clear, unequivocal inflation which came through. Rate hikes will most certainly boost banks higher, which is why adding them to your portfolio looks like a smart option.
Pace of Rate Hikes Likely to Increase
A significant number of the participants of the Fed meeting held between Jan 30-31 said that they had raised their growth projections from the preceding month. Resilient global economic growth, bullish financial markets and the stimulus released by recent tax cuts would propel the economy higher than what is being currently expected. Others were of the opinion that these same factors had increased “upside risks” for the economy.
But the majority of the participants opined that firmer expectations for economic growth have raised the odds in favor of gradual monetary policy tightening. This view was reflected in the manner in which the report’s language was changed to include an indication regarding “further” rate increases.
Scanty Evidence on Wage Growth?
Members of the U.S. central bank agreed that they have failed to recognize the true impact of recent tax cuts. But there was uncertainty about what impact these cuts would have on wages. Following the tax cuts, several companies have issued bonuses to their employees. But the long term impact of these recent cash transfers remains unclear at this point.
Ultimately, the Fed found little evidence up to their meeting about a sector wide increase in wage growth. This part of the report gladdened the hearts of investors initially.
However, they were quick to recognize that the Fed’s meeting was closely followed by strong jobs data which reflected a year-over-year pickup in wage growth. Also released almost immediately afterward was strong CPI data which exceeded most expectations.
Outlook for Inflation Improves
Only a “few” of the 12 districts surveyed by the Federal Reserve observed that companies in those regions had relevant pricing power. Meanwhile, a small section of officials took a dovish stance, arguing that inflation would continue to come in under the Fed target of 2%. They think recent tax cuts would force businesses to engage in a pricing war to capture market share.
But the overwhelming majority of officials at the Fed projected that an increase in inflation was likely to ensue. According to the minutes, the index for core personal consumption expenditure or core PCE would increase at a noticeably faster pace this year. This would imply a substantial hike over the 1.5% pace recorded in December.
The overall tone of the latest Fed meeting minutes indicates that a majority of members favor a gradual step up in rates over the current year. A strong growth environment supportive financial markets and recent tax cuts have pushed up growth projections which in turn have raised the odds for rate hikes.
This is why it makes good sense to pick select bank stocks at this point. We have narrowed down our search to the following stocks based on a good Zacks Rank and other relevant metrics.
M&T Bank has a Zacks Rank #1 (Strong Buy). The company has expected earnings growth of 30.5% for the current year. The Zacks Consensus Estimate for the current year has improved by 5.1% over the last 30 days.
Comerica has expected earnings growth of 33.2% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.5% over the last 30 days. The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Citigroup has a Zacks Rank #2 (Buy). The company has expected earnings growth of 20% for the current year. The Zacks Consensus Estimate for the current year has improved by 1.1% over the last 30 days.
PNC Financial Services has a Zacks Rank #2. The company has expected earnings growth of 22.8% for the current year. The Zacks Consensus Estimate for the current year has improved by 1.3% over the last 30 days.
State Street has a Zacks Rank #2. The company has expected earnings growth of 29% for the current year. The Zacks Consensus Estimate for the current year has improved by 5.4% over the last 30 days.