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Fed Views Steeper Rate Cuts in 2024: ETFs That Gained
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The Federal Reserve held its benchmark interest rate steady at a range of 5.25%-5.50% on Dec 13, 2023, marking the highest level in over two decades. However, the central bank indicated a potential future rate cut of 0.75% in the coming year.
Fed Chairman Jerome Powell elaborated on the change, stating that we are likely at or near the peak rate for this cycle. Seventeen Fed officials anticipate rate cuts in the coming year, with five of them expecting reductions of more than 0.75%, while only two officials foresee no rate cuts. No officials predict higher rates in 2024.
Revision in Rate Cut Expectations
In contrast to earlier projections of a 0.50% rate cut, the Fed now anticipates a series of three 25-basis-point rate reductions in 2024. The Fed now anticipates the peak of the fed funds rate at 4.6% in 2024, down from the previous projection of 5.1%, suggesting a 0.75% rate cut in the upcoming year.
Inflation, Unemployment, and Economic Growth Projections
The Summary of Economic Projections (SEP) revealed the Fed's core inflation outlook, expecting it to peak at 2.4% in the next year, lower than the previous 2.6% projection. The Federal Reserve expects a further decline in inflation to 2.2% by 2025.
Notably, the core Personal Consumption Expenditures index, the Fed's preferred inflation measure, showed a reading of 3.5% for October, down from 3.7% in September and 4.3% in June. The Fed’s target for this index is 2%.
Unemployment is projected to reach 4.1% in 2024 and remain at that level through 2026. Economic growth is forecasted at 1.4% in the next year, down from the previous 1.5% projection, with slight improvements in 2025 and 2026.
Market Reaction
Following the release of the economic projections, market expectations shifted, with a nearly 60% likelihood of rate cuts beginning in March, up from 40% the day before, according to CME Group data. Stocks surged while the 10-year Treasury yield dropped approximately 11 basis points to hover around 4.1% following the Fed's decision.
Below we highlight a few ETFs that gained/benefited massively on the hopes of deeper rate cuts next year.
Winning ETFs
Gold – SPDR Gold Trust (GLD - Free Report) – Up 2.3% on Dec 13
The news is great for gold bullion price. As the Fed rate cut hope lowered the greenback strength as evident from a 0.9% decline in Invesco DB US Dollar Index Bullish Fund (UUP - Free Report) , gold ETFs are destined for a leg up next year. Since gold is priced in the U.S. dollar, a lower greenback is favorable for gold investing.
Asian stocks joined a global rally following the Fed’s optimism, reigniting a bullish pulse across markets as inflation eases. A weaker greenback and lower interest rate in the United States should boost Asian markets too.
Dow Jones – SPDR Dow Jones Industrial Average ETF (DIA - Free Report) – Up 1.5%
The Dow gained nearly 500 points on Dec 13, breaching 37,000 and hitting its record high. After lagging its other big peers, the Dow Jones Industrial Average is catching up pretty well. We expect the trend to continue in next year too.
The latest change in Fed’s tone could stimulate stock growth, especially in regional bank stocks, since experts believe the banking crisis was triggered by a sharp increase in interest rates over the past year. Plus, the Fed rate cuts will likely steepen the yield curve, which is another positive for the space.
Real Estate – Vanguard Real Estate ETF (VNQ - Free Report) – Up 3.8%
The space couldn’t do well in 2023. However, with rates likely to dive next year, real estate stocks – that thrive in a low-rate environment – are likely to excel. The fund VNQ even yields 4.28% annually. This is a plus for investors.
Word of Caution
Powell reiterated the need for caution, highlighting that the Fed requires more evidence of inflation moving toward its 2% target. He expressed the view that the economy could still surprise in various ways in the upcoming year.
While Powell noted that there is currently little indication of a recession this year, he indicated the ongoing probability of a recession in the next year, indicating the uncertainty in the economic outlook.
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Fed Views Steeper Rate Cuts in 2024: ETFs That Gained
The Federal Reserve held its benchmark interest rate steady at a range of 5.25%-5.50% on Dec 13, 2023, marking the highest level in over two decades. However, the central bank indicated a potential future rate cut of 0.75% in the coming year.
Fed Chairman Jerome Powell elaborated on the change, stating that we are likely at or near the peak rate for this cycle. Seventeen Fed officials anticipate rate cuts in the coming year, with five of them expecting reductions of more than 0.75%, while only two officials foresee no rate cuts. No officials predict higher rates in 2024.
Revision in Rate Cut Expectations
In contrast to earlier projections of a 0.50% rate cut, the Fed now anticipates a series of three 25-basis-point rate reductions in 2024. The Fed now anticipates the peak of the fed funds rate at 4.6% in 2024, down from the previous projection of 5.1%, suggesting a 0.75% rate cut in the upcoming year.
Inflation, Unemployment, and Economic Growth Projections
The Summary of Economic Projections (SEP) revealed the Fed's core inflation outlook, expecting it to peak at 2.4% in the next year, lower than the previous 2.6% projection. The Federal Reserve expects a further decline in inflation to 2.2% by 2025.
Notably, the core Personal Consumption Expenditures index, the Fed's preferred inflation measure, showed a reading of 3.5% for October, down from 3.7% in September and 4.3% in June. The Fed’s target for this index is 2%.
Unemployment is projected to reach 4.1% in 2024 and remain at that level through 2026. Economic growth is forecasted at 1.4% in the next year, down from the previous 1.5% projection, with slight improvements in 2025 and 2026.
Market Reaction
Following the release of the economic projections, market expectations shifted, with a nearly 60% likelihood of rate cuts beginning in March, up from 40% the day before, according to CME Group data. Stocks surged while the 10-year Treasury yield dropped approximately 11 basis points to hover around 4.1% following the Fed's decision.
Below we highlight a few ETFs that gained/benefited massively on the hopes of deeper rate cuts next year.
Winning ETFs
Gold – SPDR Gold Trust (GLD - Free Report) – Up 2.3% on Dec 13
The news is great for gold bullion price. As the Fed rate cut hope lowered the greenback strength as evident from a 0.9% decline in Invesco DB US Dollar Index Bullish Fund (UUP - Free Report) , gold ETFs are destined for a leg up next year. Since gold is priced in the U.S. dollar, a lower greenback is favorable for gold investing.
Asia – iShares Asia 50 ETF (AIA - Free Report) – Up 1%
Asian stocks joined a global rally following the Fed’s optimism, reigniting a bullish pulse across markets as inflation eases. A weaker greenback and lower interest rate in the United States should boost Asian markets too.
Dow Jones – SPDR Dow Jones Industrial Average ETF (DIA - Free Report) – Up 1.5%
The Dow gained nearly 500 points on Dec 13, breaching 37,000 and hitting its record high. After lagging its other big peers, the Dow Jones Industrial Average is catching up pretty well. We expect the trend to continue in next year too.
Regional Banks – SPDR S&P Regional Banking ETF (KRE - Free Report) – Up 5.9%
The latest change in Fed’s tone could stimulate stock growth, especially in regional bank stocks, since experts believe the banking crisis was triggered by a sharp increase in interest rates over the past year. Plus, the Fed rate cuts will likely steepen the yield curve, which is another positive for the space.
Real Estate – Vanguard Real Estate ETF (VNQ - Free Report) – Up 3.8%
The space couldn’t do well in 2023. However, with rates likely to dive next year, real estate stocks – that thrive in a low-rate environment – are likely to excel. The fund VNQ even yields 4.28% annually. This is a plus for investors.
Word of Caution
Powell reiterated the need for caution, highlighting that the Fed requires more evidence of inflation moving toward its 2% target. He expressed the view that the economy could still surprise in various ways in the upcoming year.
While Powell noted that there is currently little indication of a recession this year, he indicated the ongoing probability of a recession in the next year, indicating the uncertainty in the economic outlook.