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US Utilities Are Strong after the Fed’s Second Rate Hike

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Fed maintains its aggressiveness

The Federal Reserve increased its benchmark interest rate by another 25 basis points on June 14, 2017—the second rate hike this year. Now, benchmark interest rates are 1%–1.25%. The Fed is on track with its target to increase the interest rate three times this year. The next increase is expected in the Fed’s meeting in September. In 2018, the Fed plans to increase the interest rate another three times.

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Core inflation, the Fed’s main economic indicator, excludes food and energy. It fell to 1.5% in April from 1.8% in February 2017—compared to the Fed’s inflation rate target of 2%. However, unemployment fell to 4.3%. The paradoxical signs of both these indicators created some haziness, but the Fed chose to remain aggressive.

XLU after rate hike

US utilities traded strong

US utilities were strong after the Fed announced the rate hike on June 14, 2017. The Utilities Select Sector SPDR (XLU) rose 0.54%, while the SPDR S&P 500 (SPX-INDEX) (SPY) traded lower for the day.

Top utilities by market capitalization including NextEra Energy (NEE) and Duke Energy (DUK) rose 0.9% and 0.4%, respectively. NRG Energy (NRG), the largest independent power producer, fell nearly 3% for the day.

Even though higher interest rates are generally considered to be negative for utilities, US utility stocks have risen nearly 7% since the rate hike in March 2017. US utility stocks have outperformed broader markets by a fair margin. Since the December 2016 rate hike, US utilities (IDU) have risen 12%, while broader markets have managed to gain 8%.

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