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What Do Yellen's Comments Mean for ETFs?

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The latest Fed assembly marked the second to the farewell meeting of Janet L. Yellen, who took office as Chair of the Board of Governors of the Federal Reserve on Feb 3, 2014. Her four-year term will end on Feb 3, 2018. Given the significant contribution that Yellen has made to the country’s financial betterment, it is important to follow what she thinks about the economy and asset class.

On Inflation

Subdued inflation has long been a key concern of the developed economies including the United States. Yellen believes that there is a 'surprising' weakness in inflation related to fleeting factors. PCE inflation for 2017 is projected at 1.7%, up from 1.6% guided in September, but the inflation guidance for 2018, 2019 and 2020 remains the same.

This is guided despite the expected windfall from the tax reform and upbeat GDP growth rates. Real GDP growth rate has now been upped to 2.5% for 2017 from 2.4% guided in September, while the GDP growth rate for 2018 has been raised to 2.5% from 2.1% guided before.

If such is the guidance for inflation, TIPS ETF iShares TIPS Bond ETF (TIP - Free Report) may not score higher next year.

On Tax Reform

Federal Reserve Chair Janet Yellen along with her colleagues expect a "modest lift" to economic growth thanks to the tax cuts proposed by President Donald Trump and Republican lawmakers. If this materializes, such moderate boost to the economy should favor small-cap ETFs like iShares Russell 2000 ETF IWM, even if the tailwind fails to boost all corners of the U.S. economy. Notably, small-cap stocks are more reliant on the domestic economy.

On a cautious note, Janet Yellen voiced concerns that deficits emerging from tax cuts may spell trouble should any recessionary situation crop up. In fact, a few economists see a looming downturn (read: Senate Passes Tax Bill: 5 ETFs to Buy Now).

Given such apprehensions, if the markets turn rocky next year, long/short ETFs like First Trust Long/Short Equity Fund (FTLS - Free Report) and Hull Tactical US ETF (HTUS - Free Report) may gain strength. Multi-asset ETFs like iShares Core Growth Allocation ETF (AOR - Free Report) and First Trust Multi-Asset Diversified Income Index Fund (MDIV - Free Report) could also be up for gains (read: Time for Defensive ETFs?).

On Bitcoin

The Fed chair indicated that the hottest trade of 2017, bitcoin, is highly speculative in nature. Not only the Fed, many central banks have warned against the speculative nature of the bitcoin in recent times following a monster rally. "It is not a stable source of value, and it doesn't constitute legal tender," as per Yellen.

However, Yellen also said that "emerging risks to financial stability" would not stem from bitcoin. The risks posed by bitcoin is "limited," as it has a "small role" in the nation's payment system. Such statements may put pressure on bitcoin trading as central banks like the Federal Reserve dilute bitcoin’s status and utility. This also raises questions about the future and success of the ETFs that have been refiled with the SEC on bitcoin futures (read: Bitcoin Soars, Will Futures Pave the Way For ETFs?).

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