In a widely expected move, the Federal Reserve raised its benchmark rate for the second time this year on Wednesday. The central bank also increased the number of projected rate hikes for this year from three to four. Further, the Fed offered a more favorable opinion on growth and inflation, raising its forecasts for the year.
The numerous changes in the terse policy statement the Fed issues indicate that the central bank is adopting a more hawkish posture. A spike in rates increases the yield spread for banks, which in turn boosts their margins. With the Fed looking to undertake further monetary tightening, picking bank stocks looks like a smart option.
Two More Rate Hikes Likely in 2018
The Federal Reserve has increased the benchmark short-term interest rate from 1.75% to 2%. Additionally, several changes were made to its policy statement, the most notable being that economic growth is “rising at a solid rate”, instead of the “moderate” pace witnessed in May. Further, unemployment has now “declined” instead of simply “staying low.”
Meanwhile, household expenditure has been “pickup up,” a clear change from the qualifier used earlier, “moderated.” Fittingly, the Federal Open Market Committee (FOMC) now thinks that two more rate hikes are likely this year.
The fresh language inserted into the statement indicated a more hawkish stance. At the same time, the Fed now seems to be comfortable with letting prices rise somewhat before it steps in to prevent overheating.
Economic Forecast Turns Bullish
The Fed also served up a more optimistic view on economic growth and raised its inflation expectations. The FOMC now believes that core inflation will hit the targeted level of 2% by the end of the year. Economic growth is likely to hit 2.8% over the same period. This is a 0.1 percentage point improvement from the Fed’s earlier estimate.
Additionally, committee members now think that the unemployment rate will decline to 3.6% by the end of 2018. This is marginally lower than the March projection of 3.8%. Apart from the two additional rate hikes that it envisions this year, the Fed also thinks three more rate hikes will take place in 2019.
The Fed seems to be more than satisfied with the current pace of growth and job additions. It also believes that inflation will soon hit its targeted level, which is why the tone of its policy statement is largely hawkish. Investors will now have to come to terms with a stiffer rate environment.
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 Zacks Rank #1 (Strong Buy) and other relevant metrics.
First Financial Northwest, Inc. (NASDAQ:FFNW) is the parent company of First Financial Northwest Bank that offers commercial banking services in Washington.
First Financial Northwest’s expected earnings growth for the current year is 77%. The Zacks Consensus Estimate for the current year has improved by 21.2% over the last 30 days.
MainStreet Bancshares (OTCMKTS:MNSB) is the holding company for MainStreet Bank that offers a range of banking services to individual and business customers.
MainStreet Bancshares’ expected earnings growth for the current year is 29.7%. The Zacks Consensus Estimate for the current year has improved by 5.8% over the last 30 days.
Popular Inc (NASDAQ:BPOP) offers a variety of banking services to individuals and businesses through its subsidiaries.
Popular’s expected earnings growth for the current year is 60.5%. The Zacks Consensus Estimate for the current year has improved by 0.4% over the last 30 days.
Associated Banc Corp (NYSE:ASB) is a bank holding company, which provides an array of banking and non-banking products and services through its subsidiaries Associated Bank, National Association and various non-banking subsidiaries.
Associated Banc-Corp’s projected growth rate for the current year is 29.2%. The Zacks Consensus Estimate for the current year has improved by 11.4% over the last 60 days.
Civista Bancshares Inc (NASDAQ:CIVB) is the holding company for Civista Bank, which offers community banking services in Ohio.
Civista Bancshares’ expected earnings growth for the current year is 30.5%. The Zacks Consensus Estimate for the current year has improved by 8.8% over the last 60 days.
Zacks Top 10 Stocks for 2018
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