Investors breathed a sigh of relief after the Federal Reserve left interest rates unchanged at the end of its two-day policy meeting. Additionally, it indicated that only two rate hikes were likely during the course of this year. During the press conference that followed, Fed Chair Janet Yellen said the central bank was weighing contradictory economic signals to determine its course of action.

Following these events, what has emerged unambiguously is that a low interest rate environment is likely to prevail over an extended period of time. While a section of stocks will benefit from the Fed’s new outlook, others are set to lose from low interest rates. This is why it is crucial to examine the impact of these decisions on rate sensitive stocks.

Rates Unchanged, Two Hikes Likely

At the end of the Federal Open Market Committee’s meeting, the central bank said in a statement that it would keep the benchmark rate unchanged between 0.25% and 0.50%. This rate is expected to approach 0.875% at the end of this year according to the new median projection of Fed officials. This is lower than the earlier estimate of 1.375%, which indicated that four rate hikes were likely over the course of the year.

The new estimate means that only two rates hikes are likely this year. The first of these is expected to take place after the Fed meets in June. At the same time the committee refused to lay out a more specific schedule for hikes and indicated that their decisions would be dependent on prevailing economic conditions as well as the future outlook. 

Yellen Signals Cautious Outlook

During the press conference that followed, the Fed Chair underlined the cautious approach the central bank was adopting. Yellen emphasized that a weak global economy and strong job growth accompanied by lackluster wage growth were among the contradictory economic factors the central bank was considering while deciding on its next course of action.

Meanwhile, the Fed acknowledged that inflation had increased over the last few months. However, the Fed Chair said she was a little skeptical about how sustainable the price increases would be as they were driven by categories which were inherently volatile.

Further, the central bank’s outlook for the economy was marginally disappointing. While expectations for labor growth remained strong, the central bank believed growth would expand at a slower rate. According to the Fed, the U.S. economy would grow by 2.2% over the current year. This is 0.2 percentage point lower than the central bank’s estimate released in December. It is likely that global economic sluggishness has affected exports and in turn growth estimates.

Stocks to Watch

Markets welcomed the Fed’s statement, possibly because it was in line with its own expectations. The Dow and S&P 500 jumped to their highest level for the year and the Nasdaq moved up 0.8%. The gainers and losers for the day reflected the rate sensitivity of several sectors to a great extent.

Gold and Consumer Staples

Prices of gold gained 2.5%, primarily due to a surging dollar. The materials sector gained as a whole as well, but gold comes into focus because of the fact that it is a natural hedge. Now that interest rates will remain low, the attractiveness of these stocks may decline, which is why it is necessary to watch the likes of AngloGold Ashanti Ltd. (AU - Snapshot Report).

The case for consumer staples is somewhat similar. The attractiveness of a stock like Tyson Foods, Inc. (TSN - Analyst Report) remains undiminished given the number of uncertainties the market faces today. But investor concerns have been somewhat alienated after the Fed’s policy statement, which might reduce their appeal.

Utilities, REITs and Banks

Both utilities and REITs gain from an environment where interest rates are expected to remain low over the long term. While utilities are a safe bet, market volatility also increases their attractiveness for investors looking for steady returns, which is why they might seek out Atlantic Power Corp. (AT - Snapshot Report) among other of this sector’s stocks. REITs will also gain from low rates and given the steady housing recovery, investors with a similar approach would bet on CBL & Associates Properties Inc. (CBL - Snapshot Report).

However, banks which had gained from the last rate hike could end up as losers from the Fed’s announcements. An increase in rates would have enabled banks to charge more for loans, leading to an increase in the spread between lending rates and the rates paid on deposits. But this is not to be and the likes of Wells Fargo & Company (WFC - Analyst Report) could lose some of their sheen.

In Conclusion

By matching investor expectations, the Fed has alleviated many of the market’s concerns about a rate hike. Further, it has laid out a roadmap for a longstanding regime of low interest rates, keeping in mind domestic weaknesses and global concerns. This is why the market is likely to benefit from the Fed’s recent actions in the days ahead.