As widely expected, the Fed stayed put in its latest meeting but has hinted at rate cuts this year. The central bank will now “closely monitor the implications of incoming information for the economic outlook.” Though the Fed acknowledged the economic wellbeing, it said that “uncertainties about this outlook have increased.”
More Fed members are now foreseeing at least one rate cut by next year. Nine members see the possibility of up to two rate cuts in the same frame of time. With inflation expectations tapering off, we really may see some policy easing this year.
Inside Economic Forecast
The Fed upgraded its forecast for 2020 real GDP growth from 1.9% in March to 2.0% but maintained the 2019 and 2021 growth forecast at 2.1% and 1.8%, respectively. The Fed projected the longer-run growth measure of 1.9%. Unemployment was guided down to 3.6% from 3.7% for 2019, 3.7% from 3.8% for 2020 and 3.8% from 3.9% for 2021.
PCE inflation expectations were cut from 1.8% to 1.5% for 2019 and from 2.0% to 1.9% for 2020 but were kept intact at 2.0% for 2021. Federal funds rate projections for 2019 were kept intact at 2.4% but lowered to 2.1% from 2.6% for 2020 and to 2.4% from 2.6% for 2021. Over the longer term, the rate was projected at 2.9%, the same was cut to 2.5% from 2.8% projected in March.
The immediate impact should be felt in the bond market and the yield on 10-year U.S. Treasury dropped to 2.03% from 2.06% recorded the day earlier. As the policy easing move is largely expected, yield on short-term, two-year bond yields fell by a sharper 12 bps to 1.74%.
iShares 20+ Year Treasury Bond ETF (TLT - Free Report) was up 0.14% while Schwab Short-Term U.S. Treasury ETF (SCHO - Free Report) added about 0.22% on Jun 19. Needless to say, stocks rallied on hopes of stimulus.
ETF Winners & Losers From Fed Activity & Guidance
High-Yield Corp Bonds – iShares Short-Term Corporate Bond ETF (IGSB - Free Report) – Up 0.3%
The Fed’s patient and likely dovish stance should boost high-yield, short-term corporate bond funds. The fund charges 6 bps in fees while it yields 3.29% annually (read: Weekly ETF Roundup: Bond Rocks, US Equity Lags).
Gold Miner – VanEck Vectors Gold Miners ETF (GDX - Free Report) – Up 1.4%
If rates dive, the greenback loses strength and gold starts glittering. Gold bullion ETF SPDR Gold Shares (GLD - Free Report) was up 0.6% on Jun 19. And gold mining ETF GDX surged as it acts as a leveraged play of the underlying asset (read: ETFs & Tax Efficiency: What Investors Need to Know).
Emerging Markets – iShares MSCI Emerging Markets ETF (EEM - Free Report) – Up 0.8%
This is another big bet amid a dovish Fed. The emerging market bloc tends to outperform amid a subdued U.S. dollar.
Utilities – Utilities Select Sector SPDR Fund (XLU - Free Report) – Up 0.8%
Who can forget utilities? This sector performs great in a low-rate environment and serves better if investing sentiments are edgy. It yields 2.26% annually.
Real-Estate– iShares Residential Real Estate ETF (REZ - Free Report) – Up 0.6%
This is yet another fund that investors can bet on. This high-yielding sector also performs well in a low-rate environment. It charges 48 bps in fees and yields 3.67% annually (read: Bet on BlackRock's Megatrends With These ETFs).
Small-Cap – iShares Russell 2000 ETF (IWM - Free Report) – Up 0.3%
With GDP growth projections almost upbeat and job market steady, domestically focused small-cap stocks are likely to do well. This is especially true given that the Fed is likely to take an accommodative stance and rates will remain low.
Financials– SPDR S&P Regional Banking ETF (KRE - Free Report) – Down 0.7%
Sectors that flourish in a rising-rate environment, skid post Fed meeting. KRE is one of them.
U.S. Dollar– Invesco DB US Dollar Index Bullish Fund (UUP - Free Report) – Down 0.5%
No wonder, U.S. dollar would be a loser amid dovish Fed signals.
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