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Fed Chair Confirms Easy Monetary Policy Will Stay: 5 Top Picks

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The Fed Chairman Jerome Powell once again reiterated that the central bank is in no hurry to alter its ongoing accommodative monetary policies any time soon. Despite mounting inflationary pressure, Powell still considers it transitory and expects it to moderate by the end of this year.

Market participants are highly concerned about an impending inflation that will sustain for long. The consumer price index (CPI) — popularly known as household inflation — have jumped in the last three months. The core PCE price index — Fed's favorite inflation gauge — also surged in recent months.

In June, the CPI increased 5.4% year over year, its highest since August 2008. The core CPI (excluding volatile food and energy items) increased 4.5%, the highest monthly jump since September 1991. Meanwhile, the producer price index (PPI) surged 7.3%, marking the second month in a row in which the PPI set a record high.

Fed 's Dovish Stance to Continue

On Jul 14, in his first of two days of testimony before Congress about the state of the economy, the Fed Chair said “substantial further progress” of the U.S. economy toward full employment and stable prices as targeted by the Fed remains “a ways off.”

According to Powell although the price level has increased more-than-expected by the Fed and will likely remain elevated in the coming months, the current spike is temporary and the condition will settle down by the end of this year as most parts of current inflation have generated from a few industries.

Prices of used cars, a major source of current inflation, are rising mainly due to soaring demand and low supply. Prices will cool down once the demand-supply imbalance stabilizes. The used car price skyrocketed more than 45% over the past year and has become the most important source of current inflation.

Powell also acknowledged that home prices have skyrocketed but the hike was not driven by any kind of reckless, irresponsible lending that led to the housing bubble of the financial crisis of 2008. Existing home prices climbed 24% year over year in May.

Per Powell, the labor market, the primary struggling segment of the U.S. economy, is yet to recover fully despite the fact that conditions have improved substantially in the last few months. The central bank considers the labor market to go a long way to reach the pre-pandemic level. Till that time, the Fed will continue its easy monetary policies.

On Jul 14, the yield of the benchmark 10-Year U.S. Treasury Note dropped 5.9 basis points to 1.356%. This yield was hovering around 1.5% when Powell gave his post FOMC meeting lecture on Jun 16. This indicates that the market is not expecting the central bank to start tapering the $120 billion per month bond-buying program any time soon.

Inflation Likely to Cool Down

One reason for the recent spike in inflation rate is the low base of last year due to coronavirus-led lockdowns. After adjusting for the base effect, inflation may not be as severe as reported by the government agencies. CPI in June 2020 was the lowest in the pandemic era. Going forward, the comparison is expected to fall.

Moreover,  the recent thrust of the demand-pull inflation will settle down once the initial euphoria of pent-up demand evaporates and the existing $300 per week unemployment benefit comes to an end in September. The supply-chain disruptions and the labor-shortage problem is likely to be solved to a great extent by this year-end.

Inflation will be transitory as most of the recent price rise will not persist in the long term. For example, supply problems of autos are primarily owing to shortages of semiconductors. Prices also increased for air travel fairs, staying in hotels, and dining at bars and restaurants. Americans were barred from enjoying these avenues during lockdowns last year.

Our Top Picks

We have narrowed down our search to five momentum stocks that witnessed robust earnings estimate revisions within the last 30 days and have strong upside left for the rest of 2021.

These stocks have popped more than 20% year to date and are regular dividend payers with the current dividend yield more than the yield on the 10-Year Note. Each of our picks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy)and has a Momentum Score of A.  You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows the price performance of our five picks year to date.

Zacks Investment Research
Image Source: Zacks Investment Research

ConocoPhillips (COP - Free Report) produces, transports and markets crude oil, bitumen, natural gas, liquefied natural gas and natural gas liquids worldwide.

The company has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for the current year has improved 17.6% over the last 30 days. This Zacks Rank #1 company  has a current dividend yield of 2.9% and the stock has soared 44.2% year to date.

Cincinnati Financial Corp. (CINF - Free Report) provides property casualty insurance products in the United States. It operates in five segments: Commercial Lines Insurance, Personal Lines Insurance, Excess and Surplus Lines Insurance, Life Insurance, and Investments.

The company has an expected earnings growth rate of 35.7% for the current year. The Zacks Consensus Estimate for the current year has improved 4.2% over the last 7 days. This Zacks Rank #1 company  has a current dividend yield of 2.1% and the stock has jumped 35% year to date.

CIT Group Inc. offers commercial financing and leasing products and other services to small and middle-market businesses. It operates through the Commercial Banking and Consumer Banking segments.

The company has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for the current year has improved 1.2% over the last 7 days. This Zacks Rank #1 company  has a current dividend yield of 3% and its stock has climbed 33.7% year to date.

Citizens Financial Group Inc. (CFG - Free Report) operates as the bank holding company for Citizens Bank, National Association that provides retail and commercial banking products and services in the United States. It operates in two segments, Consumer Banking and Commercial Banking.

The company has an expected earnings growth rate of 98.8% for the current year. The Zacks Consensus Estimate for the current year has improved 0.6% over the last 7 days. The Zacks Rank #2 company  has a current dividend yield of 3.5% and its stock has advanced 24.7% year to date.

International Paper Co. (IP - Free Report) is a global producer of renewable fiber-based packaging, pulp and paper products with manufacturing operations in North America, Europe, Latin America, Russia, Asia, and North Africa. It operates through three segments: Industrial Packaging, Global Cellulose Fibers, and Printing Papers.

The company has an expected earnings growth rate of 74.6% for the current year. The Zacks Consensus Estimate for its current-year earnings has improved 1% over the last 30 days. This Zacks Rank #1 stock has a current dividend yield of 3.3%. The stock price has surged 23.6% year to date.