'Not A Single Person On The Committee Wrote Down A Rate Cut This Year': Jerome Powell Warns That Inflation 'Hasn't Really Moved Down' — 3 Strategies For A High Rate Environment

If you think the U.S. Federal Reserve is about to turn dovish, think again.

Despite not raising its benchmark interest rates at the June meeting, the Fed remains focused on taming inflation.

“Not a single person on the committee wrote down a rate cut this year, nor do I think it is at all likely to be appropriate if you think about it,” Fed Chairman Jerome Powell said during his press conference earlier this month.

According to data released by the Bureau of Labor Statistics, the U.S. consumer price index (CPI) increased 4% in May from a year ago, marking the smallest 12-month increase since March 2021.

But that doesn’t mean the Fed’s job is done.

“Inflation has not really moved down. It has not so far reacted much to our existing rate hikes. And so we're going have to keep at it,” Powell said.

The Fed has raised the federal funds rate by 500 basis points since March 2022. And Powell doesn’t see rates going back down anytime soon.

“It will be appropriate to cut rates at such time as inflation is coming down really significantly… we're talking about a couple of years out,” he said.

High interest rates can hurt earnings and stock prices. Here’s a look at three strategies investors can use to navigate this environment.

Check Out Bank Stocks

Many businesses fear high interest rates because they lead to increased borrowing costs and reduced consumer spending. But for banks, it can be a different story.

Banks make money from the spread between the interest rates at which they borrow and lend. When interest rates rise, it can lead to an expansion of their net interest margins.

Case in point: Bank of America generated $26.3 billion of revenue in Q1 of 2023, which represented a 13% increase year over year. Notably, net interest income grew 25% to $14.4 billion thanks to “higher interest rates and solid loan growth.”

It’s a similar story at Wells Fargo & Co. In Q1, the bank’s net interest income soared 45% year over year to $13.3 billion. Management attributed the increase to “higher interest rates, higher loan balances and lower mortgage-backed securities premium amortization.”

Investors who want to gain exposure to the sector can also look into ETFs like the SPDR S&P Bank ETF (KBE) and the Invesco KBW Bank ETF (KBWB).

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Explore Insurance Companies

Insurance companies invest the premiums they receive from policyholders to generate investment income. One common investment held by these companies is debt securities.

In a high-rate environment, bonds and fixed-income instruments tend to offer high yields. Insurance companies can generate substantial investment returns as they invest the premiums in these high-yielding securities.

For instance, Allstate Corp reported a 57% year-over-year increase in its market-based investment income in Q1 of 2023, due to “higher interest rates and investment balances.”

Primerica Inc’s latest earnings report also noted “the benefit of higher interest rates” on its net investment income.

As is the case with bank stocks, ETFs can serve as a valuable reference for investors interested in the insurance sector. You can check out names like the SPDR S&P Insurance ETF (KIE) and the iShares U.S. Insurance ETF (IAK).

Look Beyond The Stock Market

Ultimately, the stock market is a volatile place. In the event of a market-wide sell-off, even companies that are well-suited for high interest rates could see their share prices decline.

So it might be worthwhile to explore investment options outside the stock market.

This can be as simple as putting money into a savings account.

Thanks to the Fed’s aggressive rate hikes, people can finally earn some return on their savings. These days, there are plenty of high-yield savings accounts to choose from.

And if those yields still don’t seem big enough, some alternative savings products offer yields of as high as 6.9%.

To fight inflation, you might want to look into real assets, like farmland. After all, no matter how long interest rates stay elevated, people still need to eat.

And it just so happens that billionaires like Bill Gates and Thomas Peterffy have been buying America’s farmland. But you don’t have to be in the three-comma club to get a piece of the action. Some platforms allow individuals to invest directly in farmland assets through the private market.

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Photo: courtesy of the Federal Reserve.