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Banks Rejoice as Fed Hikes Rate, Raises Economic Outlook

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The Federal Reserve announced the first rate hike of 2018 at the Federal Open Market Committee (FOMC) meeting Wednesday, under Chairman Jerome Powell’s debut meeting. The Fed was tempted by the strengthening economy, optimism on reaching the inflation target this year and impressive labor market gains.

The benchmark federal funds rate has been hiked to 1.50-1.75% from the 1.25-1.50% raised in December 2017. Notably, this is the sixth increase in interest rates since the financial crisis, which led the Fed to lower rates to nearly zero.

“The economic outlook has strengthened in recent months,” the policy-setting FOMC stated on Wednesday in Washington. Officials repeated the previous language that they anticipate “further gradual adjustments in the stance of monetary policy.”

Policymakers increased their expectations for economic growth and continued with their projections of total three hikes in 2018. Furthermore, they increased their projection to three hikes in 2019 from the two forecasted in the December meeting.

The central bank projects economic growth at the rate of 2.7% in 2018, up from the previous expectation of 2.5%, attributed to the encouraging U.S. consumer confidence. Further, growth rate is anticipated to be 2.4% in 2019 — moderately higher than the December forecast of 2.1%.

“The job market remains strong, the economy continues to expand, and inflation appears to be moving toward the FOMC’s 2 percent longer running goal,” Powell stated in a press conference.

Additionally, based on the updated economic projections, Fed expects inflation to be at 1.9% this year, near about its target of 2%. The unemployment rate in 2018 is predicted to fall to 3.8%, down from the prior forecast of 3.9%. Also, it is estimated to decline to 3.6% in 2019, again down from the previous projection of 3.9%.

“Job gains have been strong in recent months, and the unemployment rate has stayed low,” the FOMC said. The statement noted that household spending and business investment “have moderated” from impressive fourth-quarter readings.

With decent economic growth, balanced near-term risks to economic outlook and recent strong gains in the labor market, rate hike is an added advantage for banks. Moreover, temporary concerns over inflation are expected to be subdued.

Following the interest rate-hike announcement, most Wall Street biggies, including Wells Fargo (WFC - Free Report) , The PNC Financial Services Group, Inc. (PNC - Free Report) , Citigroup (C - Free Report) and Bank of America (BAC - Free Report) , increased their prime lending rate to 4.75%, effective Mar 22, 2018.

Notably, PNC Financial and BofA, Zacks #3 (Hold)-ranked players, highlight their optimism on the banks’ bright future prospects, with shares rising 10.1% and 8%, respectively, year to date. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

However, shares of Wells Fargo and Citigroup have declined 9.7% and 1.5%, respectively, during the same time frame.

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