By raising the benchmark US interest rate by 25bps to 1.25%, the Federal Reserve has shown its confidence in the domestic economy and financial conditions. The fourth hike since the financial crisis, and the third in seven months, follows the US unemployment rate hitting a 16-year low of 4.3% last month but also soft growth in the first quarter, from which the Fed believes the economy will rebound quickly. With rates edging closer to normalisation, the market is focused on whether the Fed will begin unwinding its balance sheet, which could begin as early as September.
This is a positive development for US small- and mid-cap companies, which are typically more exposed to the domestic economy than large-caps and are therefore more likely to benefit from its ongoing strength. We continue to identify stocks across sectors with durable competitive advantages, and invest for the long term when they are trading below their intrinsic valuations.