Higher inflation has been rough on us all.
And unfortunately, it could get worse.
With surging costs for gas, food, and housing, consumer inflation soared 7.9% year over year.
That’s the biggest spike we’ve seen in 40 years.
While the Federal Reserve once referred to inflation as transitory, they’re quickly realizing just how wrong they were. Even Allianz Chief Economic Advisor Mohamed El-Erian has said, “The characterization of inflation as transitory is probably the worst inflation call in the history of the Federal Reserve, and it results in a high probability of a policy mistake.”
Nowadays, the Fed realizes it has to be far more aggressive against inflation.
In fact, Chairman Jerome Powell told the National Association for Business Economics, ““The labor market is very strong, and inflation is much too high. We will take the necessary steps to ensure a return to price stability. In particular, if we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so. And if we determine that we need to tighten beyond common measures of neutral and into a more restrictive stance, we will do that as well.”
Unfortunately, markets didn’t like that news at all.
So, how do we profit from higher rates?
One way is to invest in the Financial Select Sector Fund (XLF). That’s because financial stocks can thrive with higher interest rates.
Look at Bank of America, for example.
Analysts are bullish on Bank of America because it’s one of the most sensitive to interest rate hikes. According to Barron’s, “With it widely expected that the Fed will raise interest rates at least three times this year, Bank of America would be poised to benefit more than peers.”
“Meanwhile, Bank of America has estimated that an instantaneous 100 basis-point increase—which would be equivalent to roughly four hikes—would improve net interest income by $7.6 billion over 12 months,” they added.
Or, take a look at the iShares U.S. Regional Banks ETF (IAT), which invests in U.S. regional banks that should benefit from higher interest rates. After all, “A rising-rate environment will help the regional banks maybe more so than those that are capital-markets dependent,” said U.S. Bancorp CFO Terry Dolan, as quoted by Bloomberg.