The Fed’s new chairman Jerome Powell’s optimistic view on U.S. economic growth and encouraging near-term inflation outlook have raised the possibility of a rate hike this month. Banks, brokerage firms, and insurers will benefit the most from this much-anticipated hike.     

Faster Pace of Policy Tightening by Fed

The Fed is likely to increase rates in the 1.5-1.75% range, at the end of the two-day Federal Open Market Committee (FOMC) policy meet tomorrow. According to the CME Fed Watch Tool, the odds of a rate hike this time is as high as 94.4%.

Powell projects the next few years to be ‘good years’ for the U.S. economy. The Fed chairman and other members of the FOMC predict that the economy will continue to improve on the back of Trump administration’s $1.5-trillion tax-cut plan and the $200-billion spending bill, rising employability, upbeat wage rates and increasing consumer confidence.  

Also, Powell’s reaffirmation on more frequent rake hikes by the Fed this year has boosted market sentiment.

Moreover, a higher-than-expected rise in wage rates this January has triggered inflation fear.  In February, the U.S. Consumer Price Index was up 2.2% year over year, while the core index improved 1.8% from the year-ago period for the third consecutive month.

The Fed’s favored gauge of inflation stands at 1.5%. However, central bankers anticipate the value to “move up” this year. Furthermore, upbeat consumer sentiment is giving rise to inflation expectations. The University of Michigan consumer-sentiment index is pegged at 102 in March, up from 99.7 recorded in February. Notably, the inflation rate in 2019 is projected at 2.9%, marking a three-year high.

Likely Gainers from a Rate Hike

Brokerage firms and asset managers will benefit from higher interest rates since rise in rates generally coincides with periods of economic strength and investor enthusiasm.

In addition, a rising-rate environment will be beneficial for bank stocks as banks widen the spread between what they earn by funding longer-term assets, such as loans, with shorter-term liabilities.