Rates on Hold? What It Means for ETF Investors

Rates on Hold? What It Means for ETF Investors

The Federal Reserve is expected to keep rates steady for the first time in 15 months.

sumit
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Senior ETF Analyst
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Reviewed by: Lisa Barr
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Edited by: Daria Solovieva

Seventeen months: That’s how long it’s been since we’ve had a FOMC meeting end without a rate hike. Today that streak will likely come to an end.  
  
According to probabilities based on prices for Fed funds futures, there is an 95% chance the U.S. central bank keeps rates steady between 5% and 5.25% when it concludes today’s meeting. 

Investors have been patiently waiting for this day to arrive. Whether it be a “pause,” a “skip” or the actual final rate hike of the cycle, it sure feels better than the relentless rate hikes that investors had to live through last year. 

And the fact that the U.S. economy, at least so far, has managed to avoid a significant downturn despite 500 basis points of rate hikes in a little over a year is as good an outcome as investors could have hoped for.  

That rosy outcome—what some would characterize as a “soft landing”—is why the SPDR S&P 500 ETF Trust (SPY) has risen nearly 23% from its October lows, putting it into bull market territory.  

Sure, in today’s post-FOMC-meeting statement and at Jerome Powell’s press conference, the Fed will likely emphasize that its job isn’t done. After all, Tuesday’s report on consumer prices for May showed core inflation growing at a 5.3% year-over-year rate, well above the central bank’s 2% target.  

But the market seems to be betting on a further softening of those numbers as the lagged effects of the Fed’s rate hikes make their way through the economy. 

History is on the side of investors as well. Following the Fed’s last rate hike, the S&P 500 rose by around 15% one year later in three of the last four cycles.  

Whether history repeats ultimately hinges on whether consumer price pressures continue to ebb. A pause is certainly music to investors’ ears, but inflation must continue falling or else the Fed might hit “play” and resume its rate hikes later this year.  

 

Contact Sumit Roy at [email protected] 

Sumit Roy is the senior ETF analyst for etf.com, where he has worked for 13 years. He creates a variety of content for the platform, including news articles, analysis pieces, videos and podcasts.

Before joining etf.com, Sumit was the managing editor and commodities analyst for Hard Assets Investor. In those roles, he was responsible for most of the operations of HAI, a website dedicated to education about commodities investing.

Though he still closely follows the commodities beat, Sumit covers a much broader assortment of topics for etf.com, with a particular focus on stock and bond exchange-traded funds.

He is the host of etf.com’s Talk ETFs, a popular video series that features weekly interviews with thought leaders in the ETF industry. Sumit is also co-host of Exchange Traded Fridays, etf.com’s weekly podcast series.

He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing chess and snowboarding in Lake Tahoe.