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As widely expected, the Federal Reserve raised interest rates and projects three more hikes next year on a strengthening economy. The Trump administration’s ambitious tax cut plan is also expected to give a modest boost to the economy over the next few years.

A strong labor market and increased consumer spending also lent the Fed officials confidence for the rate hike. When it comes to soft inflation, Fed Chair Janet Yellen has said that the Fed need not wait for the price pressure to pick up before raising rates again.

This calls for investing in banks, insurance and brokerage houses as such institutions will see a ramp up in profits next year on steady interest rate hikes and stable economic conditions.

Fed Raises Rates, Eyes Three More for 2018

Fed officials raised short-term interest rates for the third time this year. The benchmark lending rate was hiked by a quarter percentage point to a range of 1.25% to 1.5%. The voting was, however, not unanimous. While Fed members, Charles Evans (president of the Fed’s Chicago regional bank) and Neel Kashkari (head of the Minneapolis Fed) voted against the hike, Trump’s Fed chairman pick, Jerome H. Powell was in support of it.

Fed officials, in fact, expect to raise rates at a steady pace in the coming years. The median expectation for rate hikes next year is pegged at three, at least two in 2019 and two more in 2020. The bullishness is based on a steadily strengthening economy, strong jobs market and an uptick in household and business outlays. Fed officials further stressed that the recent hurricane-related disruptions were temporary and won’t affect economic growth over the long haul.

Steadily Strengthening Economy

Fed officials predicted that the economy will expand at a seasonally adjusted rate of 2.5% next year, higher than the previous forecast of 2.1%. The economy had already seen the fastest growth in three years in the third quarter of this year, which itself highlights its resilience toward devastating events like the hurricanes. Further, the economy is on track to expand in the fourth quarter by 2.9%, according to the Atlanta Fed’s GDPNow tracking estimate.

Trump also suggested that his $1.5-trillion tax cut policy will drive economic growth. He believes that the economy is in good health and will almost double next year.

Strong Labor Market

Fed also cited that the labor market is in good shape and the jobless rate will decline from the current 4.1% to 3.9% in 2018 and 2019. Unemployment rate continues to remain below 5% for over a year, a level that many market pundits consider to be near full employment.

Job additions in the U.S. economy has already topped the 200,000 mark for the second straight month in November, reflecting a bounce back after hurricanes in Texas and Florida affected hiring in September. Moreover, average workweek for American workers edged up to 34.5 hours from 34.4. The average workweek for all workers rose to a five-month high, which indicated that companies are making existing employees work harder that may ultimately lead to hiring of more permanent staffers.

Is Inflation a Botheration?

The Fed’s preferred inflation gauge continues to run below the desired target range of 2%. The core Personal Consumption Expenditures index was at 1.4% in October, while another measure of inflation, the core Consumer Price Index, came in at 1.7% for November.

However, low inflation shouldn’t affect an economy that is growing at a steady pace and operating at almost full employment. In fact, Fed officials themselves expect inflation to rise to 1.9% in 2018 and touch the 2% mark in 2019.

Who Stands to Benefit From a Rate Hike in 2018?

Higher interest rates can boost bank profits as they increase the spread between what banks earn by funding longer-term assets, such as loans, with shorter-term liabilities.

Non-banking financial institutions including insurance companies, asset managers and brokerage firms should also benefit. Rising rates act as a boon for insurance companies as they derive their investment income from investing premiums, which are received from policyholders in corporate and government bonds. Yields and coupons on these bonds rise in response to a hike in Fed fund and bank interest rates. This enables life insurers to invest their premiums at higher yields and earn more investment income, expanding their profit margins.

Brokerage firms and asset managers also gain immensely from a rising rate environment since an increase in rates generally concurs during periods of economic strength and upbeat investor sentiments.

5 Solid Choices

Given the aforementioned factors, we have selected five solid stocks from these areas that boast a Zacks Rank #2 (Buy). The search was also narrowed down with a VGM Score of A or B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.

BCB Bancorp, Inc. (BCBP - Free Report) operates as the holding company for BCB Community Bank, a state chartered commercial bank that provides banking products and services to businesses and individuals in the United States. The company has a VGM Score of B. The company is expected to return 46% this year, higher than the industry’s projected return of 9.9%. The stock’s earnings are likely to increase 14.1% next year.

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HopFed Bancorp, Inc. (HFBC - Free Report) operates as the bank holding company for Heritage Bank USA, Inc. that provides various banking products and services. The stock has a VGM Score of B. HopFed Bancorp is expected to return 54.3% this year, more than the industry’s projected return of 8.8%. The company’s earnings are likely to increase 4.8% next year.

Stifel Financial Corp. (SF - Free Report) , a financial services and bank holding company, provides retail and institutional wealth management, and investment banking services to individual investors, corporations, municipalities, and institutions in the United States. The company has a VGM Score of A. Stifel Financial is expected to outperform the industry this year (+44.4% vs +16.2%). The stock’s earnings are likely to grow 15.9% next year.

Selective Insurance Group, Inc. (SIGI - Free Report) provides insurance products and services in the United States. The stock carries a VGM Score of B. The company is expected to return 11.8% this year, in contrast to the industry’s projected decline of 12.4%. The stock’s earnings are likely to increase 7.3% in 2018.

Artisan Partners Asset Management Inc. (APAM - Free Report) is a publicly-owned investment manager. The company has a VGM Score of A. Artisan Partners’ expected growth rate for the current year is 54.1%, way higher than the industry’s estimated rally of 9.9%. The company’s earnings are expected to grow 11.4% in 2018.

Zacks Editor-in-Chief Goes ""All In"" on This Stock

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