Fed Tightens Again, Removes 'Accommodative' Wording
The move to raise interest rates was expected, and we see no change to our long-term rate projections.
As expected, the Federal Open Market Committee voted to raise its target rate range to 2.00%-2.25% during its September meeting. The vote was unanimous. Economic data remains positive for the U.S., with unemployment remaining quite low, household spending and business investment remaining constructive, and real GDP growth expected to be above 3% for 2018. The FOMC’s statement maintained essentially all its language, upholding that further hikes would be gradual and that the risk outlook remains roughly balanced. However, we did notice that the committee removed language that had previously stated that the stance of monetary policy remains accommodative. This suggests to us that the FOMC is getting closer to what it views as a neutral rate in the current environment, and may not be certain they are still being accommodative even as the market still expects many more rate hikes. Overall, even as our medium-term rate forecasts may change, our long-term rate projection remains intact, and we would expect overall net interest margins to increase at a reduced pace regardless, as competition picks up among banks. Therefore, we are leaving current fair value estimates in place for all of our banks.
The most rate-sensitive names we cover remain Comerica and M&T, but we believe the market largely understands this already, and we view the names as fairly valued. Instead, we still see some value in Wells Fargo, given the pessimism and poor headlines continuing to plague the bank. Further, with banks in general simply treading water for 2018 year to date, we are beginning to see our broader coverage as more fairly valued today than we did at the start of the year.
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