Federal Reserve Chair Janet Yellen said that the Fed is mulling over an interest rate hike “relatively soonâ€, courtesy of the healthy rise in job creation and inflation. Donald Trump’s victory may also spur a rate hike due to his pledge to trim tax and push infrastructure outlays.
Trump’s intention to roll back regulations as well as heightened uncertainty surrounding his win might stand in good stead for the broader financial sector. Given these positives, financial mutual fund investments are likely to prove profitable.
Rate Hike in the Cards
Yellen had signaled at possibilities of the U.S. central bank raising interest rates as employers continued to add jobs at a steady clip and inflation moved north. While the unemployment rate declined 0.1 percentage point last month to 4.9%, the U.S. consumer prices rose in October from a year earlier at the fastest rate in two years. The economy is also showing signs of strength, with housing starts surging to a nine-year high last month as builders ramped up construction of both single and multi-family homes.Â
Expectations for an interest-rate increase in December have grown in recent sessions. The federal funds futures contracts already imply a greater than 90% chance of a quarter-point hike in December. A hike in rates will unequivocally benefit banks and insurers. Firstly, profits for banks rise when rates move higher, since their spread will also increase. Secondly, most banking stocks are trading at a cheaper price compared to the overall market. For insurance companies, investment income forms a major revenue component. A low rate puts pressure on investment income and in turn on investment yields. Hence any increase in the interest rate would lead to gains for insurers.
Trump’s Win Raises Hopes for Financial Sector
Regulatory burden that had plagued the financial industry for quite some time is likely to ease under Trump’s administration and Republican controlled congress. One such change will be the raising of the minimum asset threshold for banking behemoths to $250 billion from $50 billion, which will lend more flexibility, boost valuations, strengthen consolidation and increase lending. Trump has called for repealing parts of the Dodd-Frank Act, which has for a considerable period of time limited operational flexibility.
