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Fed Keeps Rates Flat, Reaffirms Patient Stance: 6 Great Picks

Swarup Gupta

At the end of its latest two-day policy meeting, the Federal Reserve opted to keep interest rates unchanged. The central bank acknowledged the improvement in economic conditions but also noted that inflation is running below its targeted level. The White House has said time and again that sluggish inflation necessitates further easing from the Federal Reserve.

Fed Chair Jerome Powell was quick to characterize sluggish inflation as temporary and reaffirmed the freedom of the central bank from political interference. However, the central bank also hinted that rates will likely remain unchanged this year.   

Rate-sensitive stocks are likely to gain from a soft rate environment. This is why it makes sense to park your funds in real estate investment trusts (REITs) and utility stocks, which also offer attractive dividends. 

Federal Funds Rate Remains Flat, Technical Cut Effected

The Federal Reserve has opted to keep the federal funds target rate unchanged in the 2.25-2.5% band. Such a move was in line with market expectations, though President Trump had urged the central bank to cut rates, citing sluggish inflationary conditions. At the same time, it made a key technical adjustment in order to keep the benchmark rate near the mid-point of the target range.

The Fed reduced the interest paid on excess reserves of banks by 0.05% to 2.35%. Before it embraced the new dovish stance, the central bank had been hiking the reserves and funds rate at the same time. This had caused the benchmark rate to move toward the ceiling of its target range.

Sluggish Inflation a Worry, Patient Stance in Place

The Fed’s policy statement reflected current economic conditions, indicating that growth remains strong. At the same time it acknowledged that inflation remains sluggish. Per the statement, “market-based measures of inflation compensation have remained low in recent months.”

The central bank stated that overall and core inflation “have declined and are running below” its targeted level of 2%. Powell believes that this level of sluggishness is transitory, predicting inflation will approach its targeted level over time. But the central bank remains comfortable with its current policy stance.

This is exactly why the Fed reiterated that it “will be patient as it determines” the path of benchmark rates. While the White House’s wish for a near-term cut may not come to a pass, chances of a rate hike taking place this year are nearly negligible.

Since the start of this year, Powell has stated that he is satisfied with the state of the U.S. economy. However, the Fed Chair has argued that he was in “no hurry” to hike rates given the headwinds that the global economy is facing.

These risks have diminished somewhat recently. But indications from China that it will reduce stimulus, opting instead to implement structural changes indicate that they continue to linger in the background.

Our Choices

The Federal Reserve’s latest policy statement provides enough reason to believe that rates will likely remain flat this year. Further, the central bank has reaffirmed that it will remain patient when taking a call on the future path of rates.

Rate-sensitive investments like utilities and REITs, which offer attractive dividends, are useful additions to your portfolio under such circumstances. We have narrowed our search to the following stocks based on a good Zacks Rank and other relevant metrics.

Otter Tail Corporation OTTR is involved in the production, transmission, distribution and sale of electric energy.

Otter Tail has a Zacks Rank #1 (Strong Buy). The company has expected earnings growth of 6.8% for the current year. The Zacks Consensus Estimate for the current year has improved 4.8% over the past 60 days. The stock has a dividend yield of 2.7%.

Plymouth Industrial REIT, Inc. PLYM is a full service, vertically integrated REITcompany.

Plymouth Industrial REIT’s expected earnings growth for the current year is more than 100%. The Zacks Consensus Estimate for the current year has improved 59.9% over the past 60 days. The stock has a dividend yield of 8% and carries a Zacks Rank #1 at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Duke Realty Corp. DRE is a domestic pure-play industrial REIT in the United States, engaged in owning, managing and developing industrial properties across the country.

Duke Realty has a Zacks Rank #2 (Buy). The company’s expected earnings growth for the current year is 5%. The Zacks Consensus Estimate for the current year has improved 1.4% over the past 30 days. The stock has a dividend yield of 2.8%.

The AES Corporation AES is a global power company.

AES Corp has a Zacks Rank #2. The company has expected earnings growth of 8.3% for the current year. The Zacks Consensus Estimate for the current year has improved 1.7% over the past 30 days. The stock has a dividend yield of 3.2%.

Alexandria Real Estate Equities, Inc. ARE is an urban office REIT with particular focus on collaborative life science and technology campuses.

Alexandria Real Estate Equities has a Zacks Rank #2. The company has expected earnings growth of 5.5% for the current year. The Zacks Consensus Estimate for the current year has improved 0.1% over the past 60 days. The stock has a dividend yield of 2.7%.

ONE Gas, Inc. OGS is a 100% regulated natural gas distribution utility.

ONE Gas has a Zacks Rank #2. The company has expected earnings growth of 6.3% for the current year. The Zacks Consensus Estimate for the current year has improved 1.4% over the past 30 days. The stock has a dividend yield of 2.3%.

Zacks' Top 10 Stocks for 2019

In addition to the stocks discussed above, would you like to know about our 10 finest buy-and-holds for the year?

Who wouldn't? Our annual Top 10s have beaten the market with amazing regularity. In 2018, while the market dropped -5.2%, the portfolio scored well into double-digits overall with individual stocks rising as high as +61.5%. And from 2012-2017, while the market boomed +126.3, Zacks' Top 10s reached an even more sensational +181.9%.

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Otter Tail Corporation (OTTR) : Free Stock Analysis Report
 
The AES Corporation (AES) : Free Stock Analysis Report
 
ONE Gas, Inc. (OGS) : Free Stock Analysis Report
 
Alexandria Real Estate Equities, Inc. (ARE) : Free Stock Analysis Report
 
Duke Realty Corporation (DRE) : Free Stock Analysis Report
 
PLYMOUTH IND RE (PLYM) : Free Stock Analysis Report
 
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