Key Equity ETFs Trade Flat as Central Bank Holds Rates in Place

Major stock ETFs were trading roughly flat after the U.S. central bank's Federal Open Market Committee (FOMC) left interest rates unchanged for a fourth consecutive time on Wednesday. 

The Federal Reserve did not indicate if it would cut rates later in the year, maintaining its recent cautiousness about inflation and the economy.

The largest stock ETFs by assets under management, the SPDR S&P 500 ETF Trust (SPY) and Vanguard 500 Index Fund (VOO) remained largely unstirred after the 2 p.m. announcement. A bond market proxy, iShares 20+ Year Treasury Bond ETF (TLT), was slightly down. 

In comments following the FOMC decision, Fed Chair Jerome Powell said that "inflation is still too high."

He added: "Our employment and inflation goals have moved toward better balance over the past year. However, in recent months, inflation has shown a lack of further progress toward our 2% objective."

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Stubborn inflation has dampened investors' hopes that the Fed would start cutting its funds rate—the short-term interest rate commercial banks charge one another for borrowing and lending excess reserves. March's Consumer Price Index showed prices rising 3.5% annually, well above the bank's 2% goal. The Personal Consumption Expenditures Price Index, the Fed's favored price gauge, climbed a discouraging 2.7% year-over-year (minus volatile food and energy costs).

An unexpected dip in the gross domestic product (GDP) last month has complicated the Fed's task of taming inflation—which soared as high as 9% in 2022—without casting the economy into a phase of high prices and little-to-no growth known as stagflation.

These fears coupled with wider macroeconomic uncertainties have sent investors fleeing from risk-on assets of different stripes. The S&P 500 and tech-heavy Nasdaq indexes each fell about 4% in April. Magnificent 7-focused ETFs that soared last year and earlier in 2024 have also sagged. 

Spot bitcoin ETFs have suffered nearly $600 million in outflows over the past 11 days after weeks of steady inflows, according to data from U.K.-based asset management firm Farside Investors. Bitcon, was recently changing hands below $57,000, its lowest point since late February, according to CoinMarketCap.

Rate Cut Expectations Sag

In the weeks prior to FOMC two-day meeting, which began Tuesday, the CME FedWatch tool had calculated a roughly 99% probability that the Fed would not hike rates. CME projections for rate cuts later in the year have also declined. It is now forecasting a more than 90% probability that the Fed will leave rates intact at its June meeting. 

On Wednesday, the bank held rates between 5.25% and 5.50%, where they've stood since last July when it raised the rate a quarter of point. That increase capped a 15-month stretch of Fed monetary hawkishness. 

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While lauding the bank's progress against inflation in recent weeks, Powell and other bankers have grown increasingly cautious in their remarks about rate cuts, vowing that their decisions would be data-driven. In his semiannual testimony before Congress in April, Powell said that the bank would likely cut rates this year but only after it "gained greater confidence that inflation was declining "sustainably."

In announcing its latest decision on Wednesday, the Fed reiterated its commitment to base future rate decisions on economic data. 

"In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook," the bank said in a statement. "The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals."

In comments Wednesday, Powell said that it was "unlikely" that the bank's "next policy move will be a hike."