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Fed on Course for December Rate Hike: 5 Bank Picks

Zacks

As was widely expected, the Fed kept interest rates unchanged at the end of its latest two-day policy meeting. However, it indicated that gradual increases are in store in the near future. It also expressed confidence in the economy while noting that business investment has slowed somewhat. However, it refrained from sounding alarmist on issues like recent market volatility and the slowdown in housing.

Market watchers think the central bank’s latest policy statement clearly indicates that a rate hike is nearly certain in December. Further, three more rate hikes are likely in 2019. An increase in rates widens the yield spread for banks, which in turn boosts their margins. Adding banking stocks to your portfolio looks like a smart option at this point.

Rate Increase Likely After Next Meeting

At the end of its two-day policy meeting, the Federal Reserve opted to keep the target range for the federal funds rate unchanged at 2 to 2.25%. However, it stated that “further gradual increases” would be needed given the current pace of economic growth, strong labor market conditions and the Fed’s inflation target of 2%.


Most investors put chances of the Fed hiking rates by 0.25% in December at 80%. This inference is being drawn from the central bank’s September dot plot. Per this forecast of interest rate projections, most Fed officials predict that the funds rate will be 0.25% higher by the end of 2018. The central bank has already hiked rates thrice this year.

The absence of any change in stance in the latest policy statement also indicates that the Fed still wishes to hike rates thrice in 2019. However, markets expect a more dovish approach, with the CME Group’s Fed Watch tool predicting only two hikes next year.

Fed Upbeat on Economy, Labor Market

The Fed also struck an upbeat note on the economy and the labor market. The central bank observed that economic expansion has been proceeding at a “strong rate.” This is a reference to the fact that GDP has increased at an average rate of 3.3% for the first three quarters and that it is likely to come in at around 3% for the year’s final quarter.

Further, the central bank noted that jobs additions have been robust recently while unemployment has declined. In October, the unemployment rate remained flat at 3.7%, the lowest since December 1969. The only negative note that it struck in the statement was to note that business investment had “moderated” recently.

There was little indication as to which factors were responsible for the downturn in investment. However, third-quarter earnings indicate that trade tensions may have forced companies to cut down on investment outlays. At the same time there were no references to the recent equity market turmoil or the current slowdown in housing.

Our Choices

Market watchers think that the Fed’s latest policy statement makes it amply clear that a rate hike is inevitable in December. A minimum of three further increases are likely to occur next year. At the same time, the central bank thinks that the U.S. economy and labor market are robust.

Adding banking stocks to your portfolio looks like a profitable option at this time. This is because these are likely to benefit from the widening of the yield spread. We have narrowed our search to the following stocks based on a good Zacks Rank and other relevant metrics.

The Bancorp, Inc. TBBK is the holding company for The Bancorp Bank which offers a variety of banking products and services.

Bancorp has a Zacks Rank #1 (Strong Buy). The company has expected earnings growth of 52.9% for the current year. The Zacks Consensus Estimate for the current year has improved by 6.9% over the last 30 days.

Bank of Commerce Holdings BOCH is the holding company for Redding Bank of Commerce that offers banking services to both individuals and businesses.

Bank of Commerce’s expected earnings growth for the current year is 42.2%. The Zacks Consensus Estimate for the current year has improved by 5.2% over the last 30 days. The stock sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

JPMorgan Chase & Co. JPM is a financial holding company with assets worth $2.62 trillion and stockholders’ equity worth $259 billion as of Sep 30, 2018.

JPMorgan Chase has a Zacks Rank #2 (Buy). The company has expected earnings growth of 35.1% for the current year. The Zacks Consensus Estimate for the current year has improved by 1.4% over the last 30 days.

U.S. Bancorp USB offers a variety of financial services in the United States. The company has operated a well-balanced business model, with non-interest income representing 44% of net revenues in 2017.

U.S. Bancorp has a Zacks Rank #2. The company has expected earnings growth of 19.8% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.5% over the last 30 days.

Citigroup Inc. C is a globally diversified financial services holding company providing a range of financial products and services.

Citigroup has a Zacks Rank #2. The company has expected earnings growth of 25.5% for the current year. The Zacks Consensus Estimate for the current year has improved by 1.5% over the last 30 days.

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