Boosted by moderating inflation levels and favorable labor market data, market expectations regarding the Fed’s interest rate cuts are rising. According to CME FedWatch Tool, interest rates are projected to fall to 5-5.25% in June, supported by a likelihood of 57.3%. Interest rates are anticipated to decline further by 100 bps throughout 2024, reaching 4.25-4.5% by the end of the year backed y a probability of 35.1%.

According to projections by Morningstar, the Fed is expected to continue with its dovish stance until the end of 2025, with interest rates witnessing a fall of more than 300 basis points.

Morningstar estimated that the Fed will bring down the interest rate to 4-4.25% by the end of the current year. This would be followed by a further decline to 2.25% to 2.50% by the end of 2025 and eventually reach 1.75% to 2.00% by the first half of 2026, marking the conclusion of the Fed's rate cuts.

Moderating Inflation Level

The annual inflation rate in the United States retreated to 3.1% in January 2024, from 3.4% in December. Market expectations for potential interest rate decreases are further heightened by a rising unemployment rate in the country.

Rise in Unemployment Rate

According to Reuters, in February, U.S. jobs growth surged but underlying labor market conditions weakened as unemployment hit a two-year high of 3.9%. Despite rising wages, higher unemployment and reduced household employment signal possible Fed rate cuts by June.

Sectors to Benefit

Reducing interest rates will maintain borrowing costs at a lower level, resulting in increased consumer spending and economic activity. Sectors like consumer discretionary tend to benefit from increased consumer spending. 

With borrowing costs reducing, capital-intensive sectors like technology also benefit from the Fed’s dovish stance, with lower rates serving as a source of cheap funding. Low rates are generally favorable for growth stocks also as they reduce the cost of borrowing, often needed to finance the expansion of companies (Read: Is it the Right Time to Invest in Growth ETFs?)

ETFs in Focus

Below, we mention a few funds for investors to increase their exposure in the above mentioned sectors to capitalize on rising rate cut expectations.

Consumer Discretionary Select Sector SPDR Fund (XLY Quick QuoteXLY - Free Report)

Consumer Discretionary Select Sector SPDR Fund has Zacks ETF Rank #1 (Strong Buy) and a Medium risk outlook. The fund has gained 7.95% over the past month and 27.87% over the past year.

Vanguard Consumer Discretionary ETF (VCR Quick QuoteVCR - Free Report)

Vanguard Consumer Discretionary ETF has Zacks ETF Rank #1 (Strong Buy) and a Medium risk outlook. The fund has gained 8.12% over the past month and 29.04% over the past year.

Vanguard Information Technology ETF (VGT Quick QuoteVGT - Free Report)

Vanguard Information Technology ETF has Zacks ETF Rank #1 (Strong Buy) and a Medium risk outlook. The fund has gained 4.95% over the past month and 48.29% over the past year.

Technology Select Sector SPDR Fund (XLK Quick QuoteXLK - Free Report)

Technology Select Sector SPDR Fund has Zacks ETF Rank #1 (Strong Buy) and a Medium risk outlook. The fund has gained 4.77% over the past month and 52.99% over the past year.

Vanguard Growth ETF (VUG Quick QuoteVUG - Free Report)

Vanguard Growth ETF has Zacks ETF Rank #2 (Buy) and a Medium risk outlook. The fund has gained 7.02% over the past month and 47.66% over the past year. 

iShares Russell 1000 Growth ETF (IWF Quick QuoteIWF - Free Report)

iShares Russell 1000 Growth ETF has Zacks ETF Rank #2 (Buy) and a Medium risk outlook. The fund has gained 6.81% over the past month and 54.73% over the past year.