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First Fed Rate Hike Since 2023, Upbeat GDP Forecast: ETFs to Gain
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Key Takeaways
The Fed raised rates by 25 basis points and projects another hike in 2026.
A stronger GDP outlook could support small-cap stocks and domestically focused ETFs.
Floating-rate, senior loan and cash-like ETFs may offer income amid rising rates.
The Federal Reserve increased its benchmark interest rate by 25 basis points on Wednesday, marking its first rate hike in three years. The unanimous decision lifted the target range to 3.75-4% from 3.5-3.75%, as policymakers sought to contain persistent inflation amid rising oil prices and renewed tensions in the Middle East.
Fed Chair Kevin Warsh said the latest economic data pointed to stronger underlying growth, but stressed that inflation remains the central challenge for policymakers.
Fed Forecasts Another Rate Increase
With the economy operating near full employment, Warsh said that the Fed could address inflation without weakening economic growth or the labor market.
The Fed’s updated Summary of Economic Projections points to an additional rate hike in 2026. Twelve officials now anticipate two rate hikes in 2026, while four project three increases and two expect just one, as mentioned on Yahoo Finance.
The median projection calls for rates to remain unchanged in 2027 following the expected increases this year, before one reduction in 2028.
Inflation Outlook Deteriorates
Policymakers raised their inflation forecasts, with headline inflation now expected to reach 3.7%, up from 3.6% previously. The core inflation forecast, which excludes food and energy prices, was lifted to 3.4% from 3.3%. The projections suggest that inflation will not return to the Fed’s 2% target until after 2028.
Fed Sees Firmer Economic Growth
Despite the inflation concerns, the Fed upgraded its economic growth forecast. GDP is now projected to expand 2.3% in 2026 compared with 2.2% in the previous forecast.
Officials also lowered their unemployment forecast to 4.1% from 4.3%, matching the current unemployment rate. Policymakers also noted that domestic spending has remained resilient, although geopolitical uncertainty continues to cloud the economic outlook.
ETFs to Benefit
Greenback
Higher U.S. rates are likely to boost the greenback while putting pressure on other currencies, as major assets such as oil and natural gas as well as agricultural commodities are priced in dollars. Invesco DB US Dollar Index Bullish Fund (UUP - Free Report) should gain. Meanwhile, Invesco CurrencyShares Euro Trust (FXE - Free Report) lost about 1% on Sept. 16, 2026.
Small Caps
Small-cap stocks are mainly domestically focused. These pint-sized stocks outperform in an improving economy. Since GDP growth projections have been updated positively, small caps should outperform. Moreover, these stocks have less export exposure, which should provide another layer of certainty as small caps do not have to bear the brunt of negative currency translations arising out of the stronger greenback. Small-cap ETF (IWM - Free Report) may benefit from the improving U.S. economy.
Floating Rate ETFs
The floating rate bond has been an area to watch lately in a rising rate environment. Floating rate bonds are investment grade and do not pay a fixed rate to investors but have variable coupon rates that are often tied to an underlying index (such as LIBOR) plus a variable spread depending on the credit risk of issuers.
Since the coupons of these bonds are adjusted periodically, these are less sensitive to an increase in rates compared to traditional bonds. Unlike fixed-coupon bonds, these do not lose value when rates go up, making the bonds ideal for protecting investors against capital erosion in a rising rate environment. iShares Floating Rate Bond ETF (FLOT - Free Report) (yields 4.34% annually) is an example in this category.
Senior Loan ETFs
Senior loans are floating-rate instruments, thus providing protection from rising interest rates. This is because senior loans usually have rates set at a specific level above LIBOR and are reset periodically, helping eliminate interest rate risk. Further, as the securities are senior to other forms of debt or equity, senior bank loans offer lower default risks even after belonging to the junk bond space. Virtus Seix Senior Loan ETF (SEIX - Free Report) yields about 7.04% annually.
Cash-Like ETFs
We believe cash and short-dated fixed income may play a greater role in adding stability to a portfolio. This is especially true given the chances of volatility amid the Fed's policy tightening. Also, short-term bond yields will rise alongside the Fed rate hikes. As a result, yields in cash-like assets such as money-market funds will rise. Cash-like ETFs have lower default and interest raterisks, too. JPMorgan Ultra-Short Income ETF (JPST - Free Report) yields 4.17% annually.
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First Fed Rate Hike Since 2023, Upbeat GDP Forecast: ETFs to Gain
Key Takeaways
The Federal Reserve increased its benchmark interest rate by 25 basis points on Wednesday, marking its first rate hike in three years. The unanimous decision lifted the target range to 3.75-4% from 3.5-3.75%, as policymakers sought to contain persistent inflation amid rising oil prices and renewed tensions in the Middle East.
Fed Chair Kevin Warsh said the latest economic data pointed to stronger underlying growth, but stressed that inflation remains the central challenge for policymakers.
Fed Forecasts Another Rate Increase
With the economy operating near full employment, Warsh said that the Fed could address inflation without weakening economic growth or the labor market.
The Fed’s updated Summary of Economic Projections points to an additional rate hike in 2026. Twelve officials now anticipate two rate hikes in 2026, while four project three increases and two expect just one, as mentioned on Yahoo Finance.
The median projection calls for rates to remain unchanged in 2027 following the expected increases this year, before one reduction in 2028.
Inflation Outlook Deteriorates
Policymakers raised their inflation forecasts, with headline inflation now expected to reach 3.7%, up from 3.6% previously. The core inflation forecast, which excludes food and energy prices, was lifted to 3.4% from 3.3%. The projections suggest that inflation will not return to the Fed’s 2% target until after 2028.
Fed Sees Firmer Economic Growth
Despite the inflation concerns, the Fed upgraded its economic growth forecast. GDP is now projected to expand 2.3% in 2026 compared with 2.2% in the previous forecast.
Officials also lowered their unemployment forecast to 4.1% from 4.3%, matching the current unemployment rate. Policymakers also noted that domestic spending has remained resilient, although geopolitical uncertainty continues to cloud the economic outlook.
ETFs to Benefit
Greenback
Higher U.S. rates are likely to boost the greenback while putting pressure on other currencies, as major assets such as oil and natural gas as well as agricultural commodities are priced in dollars. Invesco DB US Dollar Index Bullish Fund (UUP - Free Report) should gain. Meanwhile, Invesco CurrencyShares Euro Trust (FXE - Free Report) lost about 1% on Sept. 16, 2026.
Small Caps
Small-cap stocks are mainly domestically focused. These pint-sized stocks outperform in an improving economy. Since GDP growth projections have been updated positively, small caps should outperform. Moreover, these stocks have less export exposure, which should provide another layer of certainty as small caps do not have to bear the brunt of negative currency translations arising out of the stronger greenback. Small-cap ETF (IWM - Free Report) may benefit from the improving U.S. economy.
Floating Rate ETFs
The floating rate bond has been an area to watch lately in a rising rate environment. Floating rate bonds are investment grade and do not pay a fixed rate to investors but have variable coupon rates that are often tied to an underlying index (such as LIBOR) plus a variable spread depending on the credit risk of issuers.
Since the coupons of these bonds are adjusted periodically, these are less sensitive to an increase in rates compared to traditional bonds. Unlike fixed-coupon bonds, these do not lose value when rates go up, making the bonds ideal for protecting investors against capital erosion in a rising rate environment. iShares Floating Rate Bond ETF (FLOT - Free Report) (yields 4.34% annually) is an example in this category.
Senior Loan ETFs
Senior loans are floating-rate instruments, thus providing protection from rising interest rates. This is because senior loans usually have rates set at a specific level above LIBOR and are reset periodically, helping eliminate interest rate risk. Further, as the securities are senior to other forms of debt or equity, senior bank loans offer lower default risks even after belonging to the junk bond space. Virtus Seix Senior Loan ETF (SEIX - Free Report) yields about 7.04% annually.
Cash-Like ETFs
We believe cash and short-dated fixed income may play a greater role in adding stability to a portfolio. This is especially true given the chances of volatility amid the Fed's policy tightening. Also, short-term bond yields will rise alongside the Fed rate hikes. As a result, yields in cash-like assets such as money-market funds will rise. Cash-like ETFs have lower default and interest raterisks, too. JPMorgan Ultra-Short Income ETF (JPST - Free Report) yields 4.17% annually.