In order to tame continued inflation, the Fed increased its benchmark interest rates by three-quarters of a percentage point to the 3%-3.25% range on Sep 21. This is now the highest federal funds rate since the beginning of 2008. What’s more, the central bank has taken the pledge to continue increasing interest rates above the current level.
Fed officials at present intend to increase interest rates until it hits a “terminal rate” of 4.6% next year, while the Fed’s “dot plot” shows that the central bank doesn’t aim to cut rates until 2024. The Fed acknowledged that such an aggressive monetary policy may unquestionably impact economic growth and lead to an upsurge in unemployment in the near term.
Then again, the monetary policy will, in due course, bring down inflation to the central bank’s target of 2% at least by 2025. Notably, the aggressive tightening is expected to pull down the Fed’s favored personal consumption expenditures (PCE) index to 5.4% this year, which stood at 6.3% in August.
Lest we forget, that drop in energy prices led to a slower-than-expected increase in the consumer price index (CPI) in August. But, prices of broader goods and services, for instance, food, rent, housing and vehicles have continued to jack up with less relief in sight. In fact, the core rate of inflation did advance 0.6% last month, higher than analysts’ projections of an increase of 0.3%.
Nonetheless, the Fed’s quest to curb the stubborn increase in essential goods and services didn’t bode well for the stock market, with almost all the sectors taking a beating in yesterday’s trading session. After all, a rise in interest rates increases the cost of borrowing and compels consumers to spend less. However, banks stand to benefit as more rate hikes are estimated to follow this year and beyond. This is because the hike in interest rates improves a bank’s profit by increasing the spread between what banks make by funding longer-term assets, including loans, with shorter-term liabilities.
Given the aforesaid positive, investing in bank stocks like UMB Financial UMBF, BCB Bancorp NJ BCBP, Eastern Bankshares EBC, S&T Bancorp STBA and Dime Community Bancshares DCOM seems prudent at the moment. These stocks boast a solid Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.
UMB Financial provides banking services and asset servicing in the United States. UMB Financial currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has moved up 7.7% over the past 60 days. UMBF’s expected earnings growth rate for the current year is 49.4%.
BCB Bancorp operates as the holding company for BCB Community Bank, a state chartered commercial bank that provides banking products and services to businesses and individuals in the United States. BCB Bancorp presently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has moved up 7.9% over the past 60 days. BCBP’s expected earnings growth rate for the current year is 34.9%.
Eastern Bankshares provides commercial banking products and services primarily to retail, commercial and small business customers. Eastern Bankshares currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has moved up 10.3% over the past 60 days. EBC’s expected earnings growth rate for the current year is 43.3%.
S&T Bancorp is a bank holding company engaged in the general banking business. S&T Bancorp currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has moved up 8.5% over the past 60 days. STBA’s expected earnings growth rate for the current year is 9.6%.
Dime Community Bancshares is the holding company for Dime Community Bank, a State-chartered community commercial bank. Dime Community Bancshares now has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has moved up 7.7% over the past 60 days. DCOM’s expected earnings growth rate for the current year is 49.4%.
By the way, over the last two-year period, shares of UMB Financial, BCB Bancorp, Eastern Bankshares, S&T Bancorp and Dime Community Bancshares have already soared 95.6%, 127%, 70.5%, 82.1% and 92.1%, respectively.
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