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As expected, on Wednesday, the Federal Reserve made a calculated move, deciding against what could have been an 11th consecutive interest rate increase. Instead, it chose to assess the implications of the previous 10 hikes. Yet, this decision came with a caveat; the Federal Open Market Committee (FOMC) hinted at another two-quarter percentage point moves before the year-end.
The potential for further rate increases led to immediate pressure on stocks, but a hopeful dialogue around combating inflation allowed a brief rebound. SPDR S&P 500 ETF Trust (SPY - Free Report) added 0.12% on Jun 14, while the Dow Jones-based (DIA - Free Report) lost 0.7% and the Nasdaq-100-based (QQQ - Free Report) jumped 0.7%.
The benchmark U.S. treasury yield slipped one percentage point from the day earlier to 3.83%, while the two-year yields jumped 7 bps to 4.74% on Jun 14. One-year U.S. treasury yield rose by 1 bp to 5.27%.
Future Rate Hike Expectations
“People expected a hawkish pause and they got a very hawkish pause,” said David Russell, vice president of market intelligence at TradeStation, as quoted on CNBC. Jerome Powell, the Fed Chair, stated at the news conference, "We've covered a lot of ground, and the full effects of our tightening have yet to be felt."
Amid this pause, an intriguing aspect came forward through the dot plot. Here, individual FOMC members indicate their expectations for future rates. The dots moved notably upward, suggesting a median expectation of a 5.6% funds rate by the end of 2023. This implies two more quarter-point hikes in the remaining meetings this year, creating a very hawkish pause. Three officials see rates rising closer to 6%.
Changes in Economic Outlook
FOMC members also revised their forecasts for future years. They now expect the fed funds rate to fall to 4.6% in 2024 and 3.4% in 2025 — both projections showing an increase from the March forecasts. These changes coincide with raised expectations for economic growth in 2023 and a more optimistic view on unemployment rates.
The Fed’s forecast for unemployment has also been adjusted, with an expected increase to only 4.1% instead of the former 4.5% prediction. The Fed anticipates a more robust economic growth for this year at 1%, a considerable improvement from the previous expectation of 0.4%.
Inflation and Its Wider Impact
Since peaking at 9.1% in June 2022, inflation has eased a lot, with headline inflation rising just 4.1% in May. The personal consumption expenditure (PCE) price index in the United States rose 4.4% year over year in April 2023. Both rates are still well above the Fed's 2% target. With inflation remaining sticky, the FOMC members adjusted their projection to 3.9% for core inflation (an uptick from the previous 3.6% estimate) and slightly decreased it to 3.2% for the headline.
ETFs That Won Amid Fed’s Hawkish Pause
Against this backdrop, below, we highlight a few ETFs that won on Jun 24 and may gain further.
Global X Artificial Intelligence & Technology ETF (AIQ - Free Report) – Up 0.7% on Jun 14; Up 1.03% after hours
SPDR Bloomberg 1-3 Month T-Bill ETF (BIL - Free Report) – Up 0.02% on Jun 14; Up 0.01% after hours
iShares U.S. Regional Banks ETF (IAT - Free Report) – Down 2.6% on Jun 14; Up 0.62% after hours
SPDR S&P 500 ETF Trust (SPY - Free Report) – Up 0.12% on Jun 14; Up 0.02% after hours
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4 ETF Winners After Fed's "Hawkish Pause"
As expected, on Wednesday, the Federal Reserve made a calculated move, deciding against what could have been an 11th consecutive interest rate increase. Instead, it chose to assess the implications of the previous 10 hikes. Yet, this decision came with a caveat; the Federal Open Market Committee (FOMC) hinted at another two-quarter percentage point moves before the year-end.
The potential for further rate increases led to immediate pressure on stocks, but a hopeful dialogue around combating inflation allowed a brief rebound. SPDR S&P 500 ETF Trust (SPY - Free Report) added 0.12% on Jun 14, while the Dow Jones-based (DIA - Free Report) lost 0.7% and the Nasdaq-100-based (QQQ - Free Report) jumped 0.7%.
The benchmark U.S. treasury yield slipped one percentage point from the day earlier to 3.83%, while the two-year yields jumped 7 bps to 4.74% on Jun 14. One-year U.S. treasury yield rose by 1 bp to 5.27%.
Future Rate Hike Expectations
“People expected a hawkish pause and they got a very hawkish pause,” said David Russell, vice president of market intelligence at TradeStation, as quoted on CNBC. Jerome Powell, the Fed Chair, stated at the news conference, "We've covered a lot of ground, and the full effects of our tightening have yet to be felt."
Amid this pause, an intriguing aspect came forward through the dot plot. Here, individual FOMC members indicate their expectations for future rates. The dots moved notably upward, suggesting a median expectation of a 5.6% funds rate by the end of 2023. This implies two more quarter-point hikes in the remaining meetings this year, creating a very hawkish pause. Three officials see rates rising closer to 6%.
Changes in Economic Outlook
FOMC members also revised their forecasts for future years. They now expect the fed funds rate to fall to 4.6% in 2024 and 3.4% in 2025 — both projections showing an increase from the March forecasts. These changes coincide with raised expectations for economic growth in 2023 and a more optimistic view on unemployment rates.
The Fed’s forecast for unemployment has also been adjusted, with an expected increase to only 4.1% instead of the former 4.5% prediction. The Fed anticipates a more robust economic growth for this year at 1%, a considerable improvement from the previous expectation of 0.4%.
Inflation and Its Wider Impact
Since peaking at 9.1% in June 2022, inflation has eased a lot, with headline inflation rising just 4.1% in May. The personal consumption expenditure (PCE) price index in the United States rose 4.4% year over year in April 2023. Both rates are still well above the Fed's 2% target. With inflation remaining sticky, the FOMC members adjusted their projection to 3.9% for core inflation (an uptick from the previous 3.6% estimate) and slightly decreased it to 3.2% for the headline.
ETFs That Won Amid Fed’s Hawkish Pause
Against this backdrop, below, we highlight a few ETFs that won on Jun 24 and may gain further.
Global X Artificial Intelligence & Technology ETF (AIQ - Free Report) – Up 0.7% on Jun 14; Up 1.03% after hours
SPDR Bloomberg 1-3 Month T-Bill ETF (BIL - Free Report) – Up 0.02% on Jun 14; Up 0.01% after hours
iShares U.S. Regional Banks ETF (IAT - Free Report) – Down 2.6% on Jun 14; Up 0.62% after hours
SPDR S&P 500 ETF Trust (SPY - Free Report) – Up 0.12% on Jun 14; Up 0.02% after hours