One of the concerns voiced by market commentators is the response of interest-rate sensitive banks and financials to the next Fed hike and the beginning of a tightening cycle. However, based on Wu-Xia Shadow Fed Funds Rate calculations by the Atlanta Fed, we’re already in a mature tightening cycle with a de-facto hike of 337.5 bps since first half of 2014.  The Wu-Xia shadow rate estimates the level of the Fed Funds rate equivalent to quantitative easing in a zero-bound environment.

During this time, financials have already seen the effect of monetary tightening from the end of QE and have shown resilience to the de-facto Fed Funds move. In 2015, the sector was down 33bps and is still down 1.62% on the year but has started to pick up since Q2 2016.

In our opinion, another 25bps or 50bps move is not going to significantly impair the banks’ and other financial institutions’ balance sheets.

Deepika Sharma is the Managing Director of Investment Research at Astor Investment Management, a participant in the ETF Strategist Channel.

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