ETFs Slide as Fed Signals More Rate Hikes

Equity markets and ETFs slumped as the Federal Reserve announced a fourth-straight 75 basis point interest rate hike and suggested that inflation will not be cooled immediately by the central bank’s actions. 

The fed funds rate now sits between 3.75% and 4%, up from near zero at the beginning of the year, as inflation has surged to 40-year highs. The Fed suggested that while more increases are coming, they may be smaller.  

“The longer the current bout of high inflation continues, the greater the chance that expectations of high inflation will become entrenched,” Federal Reserve Chair Jerome Powell said in a press conference after the increases were announced. “It will take time, however, for the full effects of monetary restraint to be realized – especially on inflation,” he said, going on to say that it “will become appropriate to slow” the pace of rate increases. 

“That time is coming, and it may come as soon as the next meeting, or the one after that,” but that no decision has been yet made, he added.  

The S&P 500 tumbled 2.5%, while the Nasdaq plummetted 3.4% after the decision. Their respective corresponding ETFs, the SPDR S&P 500 ETF Trust (SPY) and the Invesco QQQ Trust (QQQ), also fell. The yield on the 10-year Treasury rose 3 basis points to 4.09%, while the policy-sensitive two-year note jumped 2 basis points to 4.61%.  

“We're not anywhere near that long-awaited Fed pivot yet,” said Kristy Akullian, senior iShares strategist at BlackRock, in an interview with ETF.com ahead of the meeting. “Our preference in terms of investment allocation is to stay invested, but stay defensive.” 

In the last month, the three largest Treasury ETFs by assets under management, the iShares 1-3 Year Treasury Bond ETF (SHY), the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) and the iShares 20+ Year Treasury Bond ETF (TLT) notched $4.1 billion in inflows collectively ahead of the rate-hike announcement, according to ETF.com data. 

“It's probably not the time to jump back into equities. I think our highest conviction tactical trades right now are primarily in fixed income,” Akullian said, adding that investors continue to see opportunities on the front end of the yield curve, but there have been increasing conversations on adding longer-duration notes to investor portfolios. 

Still, the central bank’s latest statement might indicate that its aggressive path in taming inflation may cool in the months to come.  

“In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments,” the Fed said in its statement concluding its two-day Federal Open Market Committee meeting. 

For investors and asset managers who have kept their eyes peeled for any sign of easing, the news may come as a bright spot. 

“Upcoming meetings will bring smaller rate hikes, but a higher eventual stopping point and for a longer period once we get there,” Greg McBride, senior economist at Bankrate.com, said in an emailed statement to ETF.com “The interest rate mantra for 2023 is shaping up as ‘Higher for Longer.’” 

Contact Shubham Saharan at [email protected]