All eyes are now on the two-day FOMC policy meeting that gets underway today. The importance of this particular meeting has surged ever since hopes started surging of the Fed lifting the key interest rates in the September meeting. Nonetheless, expectations of a September rate hike has started fading as uncertainty took over in recent days. Today, let’s look at funds in focus if the Fed does not announce a rate hike.

During the July meeting, the Fed had not provided any clue about the timing of the rate hike, but had somehow left the door open for a September hike. Nonetheless, many new events have changed the financial world scenario since the last Federal Open Market Committee meeting that was held in July.

Subdued inflation is a worry though labor data has been encouraging. But the latest batch of economic data has not really clarified if the Fed can raise rates. Meanwhile, China, the second largest economy, has consistently reported dismal economic data of late; sparking global economic slowdown fears that led to global market selloffs. Moreover, what is causing much of the uncertainty is market volatility.

Rate Hike Uncertainty

Moving beyond the economic data, a strong reason for not hiking the rate is market volatility. It may not be easy for the Fed to raise rates amid such volatile market. In fact, the Fed has never raised key federal funds rate when the CBOE Volatility Index (VIX) has been above 25 in the last 20 years. The average level of VIX has been just 15.7 when rates have gone up. This is even lower the long-run average of 20. VIX is “a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index (SPY) option prices.”

What is worse for investors is that volatility is predicted to continue for some more time. According to the Wells Fargo Advantage Funds chief portfolio strategist Brian Jacobsen, volatility may continue for three to four months. China, one of the primary reasons for the market rout, cannot assure less volatility. Recently in China, a measure of 50-day volatility had increased to its highest point in 18 years.

While a 0.25% rate hike cannot be ruled out completely, recent comments and other events have also come in to suggest otherwise. While traders of short term interest rate futures are giving a one-in-four chance of a rate hike, primary dealers or economists from banks dealing directly with the Fed have picked December to have a higher chance of the rate hike coming in. Conflicting data points also have intensified the uncertainty. As said, the inconclusiveness is prominent.

Opinion Polls Go Against Rate Hike

According to The Wall Street Journal, 46% of economists surveyed last week forecasted a rate hike in the Sep 16-17 meeting, while the majority of them expects a rate hike later this year. The tally fell sharply from an early August poll that saw 82% of economists supporting a rate hike in September. A Bloomberg calculation shows that chances of rate hike in September have dropped to 30% now. At the start of August, it was at a 54%.

Meanwhile, Goldman Sachs also forecasts a rate hike in December. Volatile markets and inflation data falling short of expectations strengthened their conviction that a September rate hike is too early. Additionally, Bankrate Economic Indicator survey shows that China’s currency devaluation leading to a massive selloff in stocks will compel the Fed to stay on hold with its liftoff this month.

Funds in Focus on No Rate Hike

The Fed seems to be stuck between global central bank easing and dollar strengthening, deflationary pressures arising from the energy sector and troubles in the global economy. Whether lifting the monetary policy stimulus would be a prudent move is the question that the Fed needs to answer.

Going by the chance of the Fed not hiking interest rates now, Utilities funds are the natural choice to buy. The Utilities sector is one of the most rate-sensitive sectors due to its high level of debt volume. Utilities are capital intensive businesses and the funds generated from internal sources are not always sufficient for meeting their requirements. As a result, the companies have to approach the capital markets for raising funds. As a result, a movement in interest rate has a significant impact on this sector.

The capital intensive utilities industry needs to access external sources of funds to expand its operations. The low interest rate environment, which has for sometime been near a zero level, has been extremely conducive for its growth. Continued low rate environment would thus be favorable for utilities funds.

However, the problem with many utilities funds is that they are in the negative territory considering the year-to-date return. This does not however mean that they do not have the potential to gain going forward. With high yield, some utilities funds may be on investors’ radar. If the Fed decides against a rate hike now, investors may even buy these funds at a discounted price.

Carrying a Zacks Mutual Fund Rank #1 (Strong Buy), American Century Utilities Investor (BULIX - MF report) has high yield of 3.19%.BULIX’s portfolio is constructed based on quantitative and qualitative management techniques. Though it is down for year to date, BULIX comes at a discount and should be a good pick for income seeking investors. Its 3 and 5 year annualized returns are 7.1% and 9.9%. Annual expense ratio of just 0.67% as compared to industry average of 1.18% also makes BULIX an inexpensive fund to add to portfolio.

Franklin Utilities A (FKUTX - MF report) has an yield of 2.79%. FKUTX seeks capital growth and current income over the long run. FKUTX invests a large chunk of its assets in utilities companies that are involved in providing electricity, natural gas, water, and communications services. The 3 and 5 year annualized returns are 7.5% and 10.4%. Annual expense ratio of 0.75% is also lower than the category average of 1.18%. FKUTX currently carries a Zacks Mutual Fund Rank #2 (Buy).

Another fund with a decent yield is Invesco Dividend Income Y (IAUYX - MF report). A large chunk of the assets of IAUYX is invested in dividend-paying securities and other instruments having similar economic characteristics. IAUYX has a dividend yield of 2.18%. The annual expense ratio of 0.87% is lower than the category average of 1.10%.