Major ETFs in Positive Territory as Fed Leaves Rates Intact

Equity and fixed income ETFs were little changed after the U.S. central bank left interest rates untouched for a seventh consecutive time amid ongoing concerns about inflation, even as the widely watched Consumer Price Index (CPI) earlier Wednesday showed prices cooling in May.

The bank's Federal Open Markets Committee held the Federal funds rate—the short-term interest rate commercial banks charge one another for borrowing and lending their excess reserves—between 525 and 550 basis points, where it has been since last July.

The largest stock ETFs by assets under management, the SPDR S&P 500 ETF Trust (SPY) and Vanguard 500 Index Fund (VOO) slipped a few fractions of a percentage point after the 2 p.m. announcement but were up about 1% in Wednesday trading. Rate sensitive funds—the bond market proxy, iShares 20+ Year Treasury Bond ETF (TLT) and growth stock proxy Invesco QQQ Trust (QQQ)—were up similarly on the day.

"In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent," the Fed said in a statement. "In considering any adjustments to the target range..., the Committee wil carefully assess incoming data, the evolving outlook, and the balance of risks."

The Fed's announcement came just hours after the May Consumer Price Index (CPI) registered no gain from the previous month and dropped slightly to 3.3% on an annual basis from April's 3.4.%—slightly lower than analysts had forecast, although the latter number was well above the central bank's 2% target. The report followed less than two weeks after the Personal Consumption Expenditures report held steady after months of disappointing readings. 

In comments later, Fed Chair Jerome Powell said that FOMC members had considered the CPI before announcing its decision. "When there's an important data print during the meeting, we make sure people remember that they have the ability to update," Powell said. "Some people do. Most people don't."

He noted that the bank will be eyeing Thursday's release of the May Producer Price Index (PPI) and the personal Consumption Expenditures index (PCE) later in the month. 

Investors have been seeking hopeful economic signals that would allow the Fed to begin reducing interest rates without the risk of spurring inflationary pressure. The likelihood of a rate cut was less than a percentage point in the days leading up to the two-day FOMC meeting that began Tuesday, according to the CME Fed Watch tool. 

Rate Cut Probability Rises

Still, the probability of a 25-basis point rate cut in September spiked past 60% Wednesday after lingering well below 50% prior to the latest CPI. The CME analysis, based on Fed funds futures pricing data, had been showing the first cut more likely coming in November with multiple cuts totaling 75 basis points occurring by April 2025. That scenario veered starkly from the outlook at the top of this year, when a steady decline in inflation had analysts expecting at least one rate cut before July. 

But surprisingly stubborn inflation readings starting in January and a robust jobs market, which is linked to inflationary pressure, has led the Fed to become more cautious. 

In his remarks, Powell noted that "recent inflation readings have been more favorable than earlier in the year," but he would not commit to a timeline for rate cuts. "We want to gain further confidence," Powell said. "Certainly, more good inflation readings will help with that. It's going to be not just the inflation rating readings. It's going to be the totality of the data, what's happening in the labor market, what's happening with the balance of risks, what's happening with growth."

The Fed's intransigence is at odds with a number of other central banks, which have turned dovish. Last Thursday, the European Central Bank cuts its deposit facility rate from 4% to 3.75%, and the bank is expected to cut rates three times this year. The Bank of Canada also cut rates last week. 

In its statement, the bank reiterated its commitment to base any rate cuts on data showing a sustainable decline in inflation. 

"The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent," the bank said. "In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities."

Read More: Europe ETFs Near Multiyear Highs After ECB's First Rate Cut