Fed Divided On Inflation: 5 Stocks To Profit From Easy Rates

A divide has emerged within the Federal Reserve over the timing of proposed interest rate hikes, according to the minutes of its July meeting. This key economic measure has remained well below the Fed’s targeted level of 2% for an extended period. Moreover, the central bank’s pet measure of inflation experienced a decline recently, adding to concerns on this count.

At the same time, the central bank looked united on the need to reduce the size of its balance sheet sooner rather than later. But the key takeaway from this document was Fed policymakers’ increased focus on the perils of low inflation levels. This has given rise to uncertainty over the timing and frequency of near-term rate hikes. Given such a scenario, investing in stocks benefiting from a soft interest rate environment may continue to be a prudent option.

Low Core PCE Inflation Raises Concerns

At the end of last month’s meeting, the Fed had opted to leave rates unchanged, a move that gladdened investors. But it now emerges that the decision was preceded by a long conversation on the recent dip in inflation levels. The Fed’s preferred inflation gauge, the core PCE inflation index, was flat at 1.5% in June. May’s figure also experienced an upward revision, to 1.4%.

But inflation still remains well below the Fed’s desired rate of 2% as well as the 1.8% pace achieved in February. The measure has slowly but steadily experienced a decline since then, which explains the concerns of a section of the Federal Reserve.

Divide on Inflation Emerges

Contrary to the Fed Chair’s views on this issue, this section of policymakers thinks that inflation may languish below the target level for a period which exceeds current expectations. They also believe that inflation runs the risk of slipping lower in the near future.

Views of such a nature have led to speculation that the central bank may reduce the pace of its projected rate hikes. Fed minutes show that a section of policymakers believe that the central bank should stay away from further rate increases until it receives conclusive proof that inflation is headed toward the targeted level.

However, during the meeting, another section of policymakers stated that the Fed could not ignore a labor market near full employment. In July, unemployment once again declined to a 16-year low of 4.3%, identical to the pace hit in May. A reluctance to reduce rates at such a point could have costly implications, which may be difficult to deal with later, they said.

Inflation to Receive Additional Attention

Comments made by Cleveland Fed President Loretta Mester on Wednesday are a good illustration of the Fed’s current dilemma. Mester clearly said that she was not in favor of waiting to raise rates until the inflation target had been achieved. At the same time, the Fed would have to take into consideration recent poor readings on inflation, she said.

Such a view is a far cry from Janet Yellen’s recent protestations, depicting inflation weakness as a short term phenomenon. Yellen had attributed this softness to a decline in the cost of prescription medication and cellular fans.

But July’s minutes revealed that Fed’s voting members have agreed to watch inflation more closely. A section of policymakers added that the central bank’s current mechanism for studying inflation was “not particularly useful.”

Our Choices

July’s Fed Minutes have conclusively proven that worries about inflation are growing within the central bank. This, in turn, is giving rise to a growing reluctance to raises rates in the near term.

This is why investing in stocks from the utilities, and real estate sectors looks prudent at this point. However, picking winning stocks may be difficult.

This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score.

We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM score.

KB Home (NYSE:KBH) is a well-known homebuilder in the U.S. and one of the largest in California.

KB Home has a VGM Score of B. The company has expected earnings growth of 51.7% for the current year. Its earnings estimate for the current year has improved by 5.6% over the last 60 days. The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

M/I Homes, Inc. (NYSE:MHO) is one of the country’s leading builders of single-family homes.

M/I Homes has a Zacks Rank #2 (Buy) and a VGM Score of A. The company has expected earnings growth of 37.1% for the current year. Its earnings estimate for the current year has improved by 0.7% over the last 30 days.

The AES Corporation (NYSE:AES) is a global power company based in Arlington, Virginia.

AES Corp has a Zacks Rank #2 and a VGM Score of A. The company has expected earnings growth of 7.1% for the current year. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 10.57, lower than the industry average of 19.99.

Just Energy Group Inc. (TO:JE) is a provider of electricity, natural gas and renewable energy across the U.S., Canada, Germany and the U.K.

Just Energy Group has a Zacks Rank #2 and a VGM Score of A. The company has expected earnings growth of 60.6% for the current year. Its earnings estimate for the current year has improved by 68.3% over the last 30 days.

Toll Brothers Inc. (NYSE:TOL) builds single-family detached and attached home communities; master planned luxury residential resort-style golf communities; and urban low, mid, and high-rise communities.

Toll Brothers has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 43.3% for the current year.

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