5 Financial ETFs To Buy As Fed Signals Sooner Rate Hike

The Fed has signaled a hawkish stance in its latest FOMC meeting though it has kept interest rates near zero. The central bank officials surprisingly raised the chances of two rate hikes by the end of 2023, sooner than the previously projected 2024.

Per an FOMC statement, the progress on vaccinations has reduced the spread of COVID-19 in the United States, and economic activity and employment have strengthened. The sectors most adversely affected by the pandemic have shown improvement but are still weak. Inflation has also risen though the Fed views this as temporary.

The central bank expects inflation to run hot this year to 3.4%, well above the goal of 2%, before receding to 2.1% in 2022. It also raised GDP growth from 6.5% to 7% for this year, the fastest calendar-year expansion since 1984. The unemployment rate remained unchanged at 4.5% as the labor market is still healing from the depths of the pandemic and has yet to recover 7 million jobs.

Further, the central bank gave no indication about the scaling back of the aggressive bond-buying program. It is currently buying $80 billion worth of Treasury securities and $40 billion worth of mortgage-backed securities per month to recover from the coronavirus pandemic.

The rate-hike prediction pushed Treasury yields higher and is expected to benefit the financial sector. Notably, the financial sector is a major beneficiary of a rising interest rate environment. This is because the steepening yield curve bolsters profits for banks, insurance companies, discount brokerage firms, and asset managers.

Additionally, accelerating economic growth, a strengthening job market, growing consumer confidence, and a solid housing market may lead to higher demand for loans and all types of financial services. Further, rising oil prices will act as catalysts given that most banks are highly exposed to the energy sector. Moreover, the upside to the finance sector is confirmed by the Zacks Sector Rank in the top 38%, which suggests outperformance in the coming months.

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