Last week, the Federal Reserve raised its interest rates as was widely expected at its recently concluded meeting. This is the third rate hike since Dec 2016, indicating that the central bank believes that the outlook for inflation remains bright despite recent soft readings. During the meeting, Fed officials have also indicated that there might be one more hike this year along with three more in the coming year.
Additionally, the central bank provided more details on the unwinding of its massive $4.5 trillion balance sheet. Moreover, the House of Representatives voted along party lines to remove a number of financial regulations put in place after the 2008 financial crisis.
An increase in interest rates would benefit banks and insurance companies since they would experience an increase in margins. Meanwhile, reducing the size of the Fed’s balance sheet would also have a positive impact on financial sector. Adding financial mutual funds which hold stocks from these sectors to your portfolio would make good sense at this point.
Fed Hike Interest Rates despite Softening Inflation
Fed officials raised benchmark federal funds rate for the third time in six months from 1% to 1.25% at its June 13-14 meeting. Additionally, Fed officials reiterated their projections of one more rate increase in 2017, followed by three hikes each in 2018 and 2019. The central bank hiked interest rates for the second time this year amid expectations that inflation is still short of central bank’s target.
As per the Labor Department, overall CPI rose 0.2% in May, less than 0.4% rise in April, showing that inflation has slowed down. The CPI rose 1% over the past twelve months. Core-CPI also gained 0.2%, in line with the consensus estimate. The annual inflation stayed lower than Fed’s target of 2%. However, Fed Chairwoman Janet Yellen believes inflation would reach its targeted level by 2018.
Shrinking the Fed’s Balance Sheet
The Fed also provided details on unwinding of its massive $4.5 trillion balance sheet at its recently concluded policy meeting last week. The Fed enlarged its balance sheet to around $4.5 trillion during the Great Recession even as it attempted to combat the fallout of a large scale financial crisis.
