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Is it Time for Growth ETFs as Fed Softens Hawkish Tone?

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In the latest statement from the Federal Open Market Committee (FOMC), the Fed hiked interest rates by 25 basis points (bps) to a funds rate range of 4.75%-5.00%. The move was largely expected. However, the Fed’s language in its statement was notably milder from the last meeting, even as it clearly stated that inflation is still “elevated.” The Fed also indicated that “some additional policy firming may be appropriate.”

The forward outlook, based on a median survey of FOMC members, expects only one more 25 bps hike throughout the rest of 2023, 75 bps in decreases by the end of 2024 and125 bps in drops by 2025 end. Wall Street may record a short-term rally as wagers on steep rate hikes from here have cooled down, and so have the banking concerns.

Wall Street has been volatile lately due to the collapse of Silicon Valley Bank, Signature Bank and Silvergate Bank. However, the banking crisis, along with cooling U.S. inflation and labor market, has led the Fed to soften its message.

Cooling Inflation

The annual inflation rate in the United States slowed to 6% in February 2023 compared with 6.4% in January. It was the lowest since September 2021 and in line with market forecasts. Compared to the previous month, the CPI increased 0.4%, following a 0.5% gain and matching forecasts. The core rate, however, inched up to 0.5% from 0.4% compared to forecasts of 0.4%.

Labor Market Easing

The United States economy added 311,000 jobs in February 2023, beating market expectations of 225,000. The unemployment rate in the United States edged up to 3.6% in February 2023, up from a 50-year low of 3.4% recorded in January and above market expectations of 3.4%. This shows signs of cooling in the U.S. labor market — a factor that the Fed considers thoroughly before taking a rate hike decision.

Banking Crisis

The regional banking crisis has roiled the global markets since Mar 9. Financial Times reported that the U.S. Treasury Secretary Janet Yellen hinted at further U.S. government backing for deposits at smaller American banks, should the need be. Notably, smaller banks felt the heat of the crisis first for holding low-yielding treasury bonds. But the fact is that big banks too have held it. Rapid spikes in Fed rates in the past year have proved detrimental to small banks’ portfolio (read: Can the Rally in Regional Bank ETFs Continue?).

Why Buy Growth ETFs?

The cues of cooling Fed rate hike momentum should bode well for growth investing as the segment suffered a lot in 2022. Since the growth sector relies on easy borrowing for superior growth and its value depends heavily on future earnings, a rise in rates lowers the present value of companies’ future earnings. Hence, a softer tone of the Fed is a positive for growth stocks and ETFs.

Against this backdrop, investors can bet on the below-mentioned top-ranked growth ETFs.

ETFs in Focus

First Trust NASDAQ-100 Ex-Technology Sector ETF (QQXT - Free Report) – Zacks Rank #2 (Buy)

Invesco Dynamic Large Cap Growth ETF (PWB - Free Report) – Zacks Rank #2

Nuveen ESG Large-Cap Growth ETF (NULG - Free Report) – Zacks Rank #2

iShares Russell Mid-Cap Growth ETF (IWP - Free Report) – Zacks Rank #2

Vanguard Mid-Cap Growth ETF (VOT - Free Report) – Zacks Rank #2

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