The Federal Reserve is expected to take a breather at its June 13-14 meeting, leaving interest rates unchanged for the first time in over a year. This pause comes after 10 consecutive rate hikes and reflects the Fed's cautious approach to balancing inflation and economic growth. While the pause may provide temporary relief, it is important to consider the potential impact on stocks and sectors.

Markets Feel Confident the Fed Will Leave Rates Unchanged

Currently, market expectations suggest a 70.1% chance of the Fed maintaining the fed funds target range at 5.00% to 5.25%, per CME FedWatch Tool. Investors are betting that rate cuts may be necessary later in the year. The Fed's balance sheet reduction, which has been a key tool in fighting inflation, is still ongoing. The balance sheet has significantly decreased, but it remains twice the size it was before the pandemic.

Fed's Possible Pause Might Not Last Forever

The Fed faces a difficult choice between raising interest rates further or maintaining a restrictive stance for an extended period. Both options have trade-offs and could slow down the economy. The latter option may help avoid excessive tightening but carries the risk of prolonging the inflation fight. The Fed needs to assess whether more rate hikes or more patience is the key to achieving price stability.

No U.S. Recession in Sight

Despite concerns about rising interest rates, the U.S. economy has shown resilience. The labor market has remained robust, with job additions exceeding expectations. However, inflationary pressures persist, and the Fed's challenge lies in achieving a soft landing for the economy.

Officials Could Be Divided on the Fed's Next Moves

Fed officials hold differing views on the appropriate path forward. Some believe the current rate hikes are not sufficient and advocate for further increases due to sticky inflation, while others see no compelling reason to pause. The division among officials makes the decision-making process more challenging.

When Will the Fed Get Inflation Down to 2%?

The Fed's projections on inflation over the next three years will provide insights into the expected duration of inflationary pressures. In March, officials projected inflation to remain above the 2% target through at least 2025. Achieving the target may require further rate hikes, but progress on inflation has been in a holding pattern recently.

ETFs to Gain

If the Fed pauses in June, the following ETFs may gain in the near term.

Technology Dividend Aristocrats ETF (TDV Quick QuoteTDV - Free Report)

If the Fed shows signs of agreeing with the market's view, it could drive Treasury yields down, potentially benefiting the mega-cap tech stocks that have propelled the market upwards this year. Growth stocks like technology fare better in a falling rate environment.

SPDR Portfolio S&P 600 Small Cap ETF (SPSM Quick QuoteSPSM - Free Report)

If the Fed nears the final Fed rate hike, the small-cap stocks may find some relief. This is especially true given the regional banking crisis is not finished yet. This is a key negative for the space. Thus, a favor from the Fed may prove to be a tailwind for the small-cap space.  Low rates are great for small-cap stocks especially as the section is mainly cash-strapped. Moreover, signs of economic recovery would favor this otherwise beaten-down zone.

iShares MSCI USA Min Vol Factor ETF (USMV Quick QuoteUSMV - Free Report)

Though markets remained steady in recent months, there is still some caution in markets because the inflation worries are not behind us. Banking crisis is also scary. With this, opportunities for low-volatility ETFs remain alive, no matter what high stocks and ETFs hit, having received a favor from the Fed.

Vanguard High Dividend Yield ETF (VYM Quick QuoteVYM - Free Report)

Many investors may land on high dividend-paying stocks and ETFs in search of higher current income. The underlying FTSE High Dividend Yield Index of the fund consists of common stocks of companies which pay dividends that are generally higher than average.