As widely expected, the Federal Reserve announced it will hold interest rates steady following the FOMC’s meeting on September 19-20. However, it predicted that there could be an additional 25 basis point rate hike later this year.
In a high-interest rate environment, most sectors usually struggle with a high cost of capital. However, the financial sector typically thrives in a high interest-rate environment because its revenues correlate positively to interest rates. Therefore, it could be wise to buy fundamentally strong consumer financial stocks OneMain Holdings, Inc. (OMF – Get Rating), FirstCash Holdings, Inc. (FCFS – Get Rating), and Regional Management Corp. (RM – Get Rating).
These stocks are rated A (Strong Buy) or B (Buy) in our proprietary POWR Ratings system. Before diving deeper into the fundamentals of these stocks, let’s discuss how the consumer financial sector will benefit in a high-interest rate environment and what could drive its performance.
Although the federal fund rates remain in the range of 5.25% to 5.5%, the Fed has warned that the war against inflation is far from over. The Summary Economic Projections (SEP) showed that there could be another rate hike by the end of this year, meaning the fed funds rate could peak in the 5.50% to 5.75% range. The SEC also projected rate cuts of 50 basis points next year.
Greg McBride, CFA, Bankrate’s chief financial analyst, said, “It is an open question as to whether the Federal Reserve will raise interest rates further in future meetings, and inflation more than anything else will dictate their course. The Fed has moved interest rates above the rate of inflation and will keep them there for an extended period. Even if they feel there is no need to raise rates further, to say so at this juncture would be premature.”
With rate cuts still some time away, the high benchmark interest rates could benefit financial companies. Consumer financial services companies offer financial products and services to individuals, households, and small businesses. Revenues of these companies get a boost in a high-interest rate environment as borrowers need to pay more on their debt. Higher interest rates help widen the spread for consumer financial companies.
Additionally, their credit quality improves as borrowers with…
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