On May 1, 2024, the Federal Reserve officials unanimously decided to maintain its benchmark interest rate within the range of 5.25%-5.50%, a level it has held since July 2023, marking a 23-year high. Fed Chair Jerome Powell emphasized the absence of significant progress toward reaching its 2% inflation target.

Powell assured markets that any future policy moves are unlikely to involve rate hikes. However, the chances of rate cuts are also less as a measure called the Private Domestic Purchases showed less GDP growth slowdown in Q1 of 2024.

GDP Growth Slowdown Not Sharp by a Measure

Powell raised an intriguing observation regarding inflation, highlighting the disparity between GDP figures. Despite the fourth quarter of 2023 showing robust growth of 3.4%, the initial reading for the first quarter of 2024 was a more modest 1.6%. However, Powell pointed out that Private Domestic Purchases (PDP), which subtracts government purchases and exports from total demand, revealed a less significant slowdown, at 3.1% growth.

The data represents a minor decrease of 30 basis points month over month. Powell emphasized that this measure indicates less slowdown in growth while inflation remains uncomfortably high. Both factors reinforce the stance against initiating rate cuts.

Status Quo in Interest Rate Policy in Near Term?

Powell's statement, "(We're) not seeing acceleration in (inflation) growth," effectively eliminates any possibility of a rate hike. The remark provided immediate reassurance to market participants, leading to a surge in market activity in real time. But the euphoria did not last long as market sentiment seemed to waver once the press conference concluded.

After all, Powell apparently viewed the economic outlook as uncertain. Despite previous hints at potential rate cuts in 2024, Powell refrained from confirming such expectations. Due to the mixed cues, Wall Street slumped with the S&P 500 losing 0.3% on May 1, 2024. The benchmark 10-year U.S. Treasury yield also dropped to 4.63% on May 1, 2024, from 4.69% recorded the day before.

Stagflation Concerns Ruled Out

Powell dismissed concerns of the economy slipping into stagflation, citing differences between current conditions and the stagflationary period of the 1970s. Also, the Fed announced changes to its balance sheet reduction program, slowing the pace of Treasury securities roll-off to avoid market disruptions.

ETFs to Gain

Against this backdrop, below we highlight a few ETFs that could be gainful in the coming days.

S&P 500 Utilities Sector SPDR (XLU Quick QuoteXLU - Free Report)

As treasury yields dived on hopes that no Fed rate hikes are in the cards in the near term, utility stocks — which perform better in a low-rate environment — should gain ahead. Even if the sector doesn’t receive the tailwind of low interest rates, there are a few factors that favor utility investing.

These stocks are non-cyclical in nature and deserve a bet even if the economy is slowing. The sector has a cheaper valuation too. The fund XLU has an average P/E of 19.54X, which is way lower than the SPY’s average P/E of 33.96X.

iShares Russell 2000 ETF (IWM Quick QuoteIWM - Free Report)

Powell’s indication of Private Domestic Purchases (PDP) registering a 3.1% expansion in Q1 supports the fact that the U.S. economy is chugging along. As smaller-cap stocks are more tied to domestic activities, small-cap ETFs like IWM should stay strong in the near term. The chances of outperformance are even higher for the fund as it has comparatively lower valuation than its bigger peers. The fund is off 1.6% so far this year.

Invesco QQQ (QQQ Quick QuoteQQQ - Free Report)

All the chaos in the market can open up good buying opportunities in the tech-heavy Nasdaq-100 index ETF QQQ. The tech sector’s supremacy is here to stay, especially due to the ongoing AI craze. Most big tech stocks are cash-rich and can depend on their cash balances to some extent to finance their projects. Plus, we may expect a Fed rate cut from late 2024. It means the rate scenario could take a turn for the better from here and not worsen. This is a key positive for tech stocks.

SPDR S&P Dividend ETF (SDY Quick QuoteSDY - Free Report)

Due to edgy market backdrop, it is intriguing to pick quality stocks at the current level. Persistent dividend growth can serve as one such quality measure. Stocks that hike dividends continuously are safe bets. Further dividend payments are expected to continue to increase in the coming months as most large U.S. companies are aflush with cash and in a position to increase payouts to their shareholders.

Simplify Managed Futures Strategy ETF (CTA Quick QuoteCTA - Free Report)

Managed futures ETFs aim to replicate the trades of computer-driven, market trend-following quant hedge funds, also known as Commodity Trading Advisors (CTAs), who have utilized trend-following strategies for decades. The fund charges 78 bps in fees (read: How Trend-Following ETFs Are Beating the Market).

Fidelity Stocks For Inflation ETF (FCPI Quick QuoteFCPI - Free Report)

Thanks to sticky inflation in the U.S. economy, inflation-protected assets demand a place in investors’ portfolios.  The underlying Fidelity Stocks for Inflation Factor Index reflects the performance of stocks of large and mid-capitalization U.S. companies with attractive valuations, high-quality profiles and positive momentum signals, emphasizing industries that tend to outperform in inflationary environments. The fund charges 15 bps in fees and yields 1.61% annually.