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.
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]