Fed Minutes Hint at September Rate Hike: 5 Banking Picks

Minutes of the Fed meeting held from Jul 31-Aug 1 revealed that the central bank is likely to announce a rate hike in September. The Fed also predicted that “strong” economic growth is likely to continue in the near future. However, it warned that trade tensions could derail the economy’s growth trajectory.

These minutes indicate that the Fed Chair will likely remain undeterred by Trump’s recent criticism and go on to hike rates a couple of times more this year. 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 in Next Meeting

According to the Fed minutes, if growth remains strong, “it would likely soon be appropriate to take another step in removing policy accommodation.” This is a clear signal that the widely expected rate hike in September will indeed occur. The Fed is expected to hike rates twice this year, next month and in December.

The meeting gave few indications as to how long the Fed would continue raising interest rates. Instead, the minutes noted that the term “accommodative,” which has been used for some years to characterize the central bank’s policy stance could be removed “fairly soon” from the minutes of future meetings.

Trade Tensions Could Hurt Growth Momentum

Despite its optimism about the economy, Fed officials believe that trade tensions could disrupt the U.S. growth story. They deliberated for quite some time on fears that a “major escalation” of trade disputes could boost inflation. Members of the Fed also believe that such tensions could cause companies to cut back on investments.

Further, the widespread imposition of tariffs “would also reduce the purchasing power of U.S. households,” per the minutes. The resulting turmoil “could include reductions in productivity and disruptions of supply chains.”

Other negative effects of prolonged trade conflicts include a downturn in the housing sector, oil price shocks and a slump in emerging markets. This is why Fed officials think that “an escalation in trade disputes” could impact future decisions on interest rates.

Our Choices

The latest Fed minutes make it pretty clear that a rate hike is nearly inevitable in September. Tweaks made to the language of the document also indicate that the Fed is likely to push up rates in the near future. This means that it is quite likely that another increase in rates will take place in December.

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.

SunTrust Banks STI is a diversified financial services holding company. It operates through its principal banking subsidiary SunTrust Bank, which provides various financial services to individuals and corporate customers in the United States.

SunTrust Banks has a Zacks Rank #1 (Strong Buy). The company has expected earnings growth of 38.9% for the current year. The Zacks Consensus Estimate for the current year has improved by 2.3% over the last 30 days.

Comerica CMA is a banking and financial services company.

Comerica’s expected earnings growth for the current year is 49.1%. The Zacks Consensus Estimate for the current year has improved by 0.3% over the last 30 days. The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Commerce Bancshares, Inc. CBSH is one of the largest bank holding companies in Missouri, with its principal offices located in Kansas City and St. Louis.

Commerce Bancshares has a Zacks Rank #2 (Buy). The company’s expected earnings growth for the current year is 40.1%.  The Zacks Consensus Estimate for the current year has improved by 0.8% over the last 30 days.

Northern Trust Corporation NTRS is the holding company for its main subsidiary, Northern Trust Company, as well as a number of other banking and non-banking financial service subsidiaries.

Northern Trust has a Zacks Rank #2. The company has expected earnings growth of 37.2% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.5% over the last 30 days.

M&T Bank Corporation MTB is the holding company for M&T Bank and Wilmington Trust, National Association.

M&T Bank has a Zacks Rank #2. The company has expected earnings growth of 37.7% for the current year. The Zacks Consensus Estimate for the current year has improved by 2.4% over the last 60 days.

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Comerica Incorporated (CMA) : Free Stock Analysis Report
 
M&T Bank Corporation (MTB) : Free Stock Analysis Report
 
SunTrust Banks, Inc. (STI) : Free Stock Analysis Report
 
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Commerce Bancshares, Inc. (CBSH) : Free Stock Analysis Report
 
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