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While the Fed Chairman Jerome Powell expects the prevailing inflation rate to be transitory, he stated in recent testimony to the U.S. Congress that the FOMC will use its tools to guide inflation back down in the event that the Fed’s narrative does not play out as it anticipates. Thus, because consumer prices increased 5.4% last month, representing the biggest monthly gain since August 2008, the economy might witness a sooner-than-expected hike in interest rates.
Because higher interest rates typically help banks generate higher interest income, investors expecting a rate hike will likely bet on bank stocks in the near- to midterm. As such, we think that SPDR S&P Bank ETF (KBE) and iShares U.S. Regional Banks ETF (IAT) could witness a solid rally.
