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Fed policymakers hinted at the possibility of interest rates remaining high for an extended period of time if inflation data remains unfavorable. According to CNBC, recently released minutes from the Apr 30-May 1 Federal Open Market Committee policy meeting indicated concerns of policymakers regarding the timing of interest rate cuts.
Highlighting concerns about inflation, the lack of confidence among policymakers regarding a reduction in interest rates is evidenced by declining market expectations for rate cuts.
Will the Interest Rate Remain High?
Revising their expectations downward from the previously priced at least six quarter-percentage point cuts, investors currently price in two rate cuts this year, as early as September. However, with the shrinking odds for more cuts, investors are giving a rate cut in September about a 50% possibility.
Several participants from the Apr 30-May 1 Federal Open Market Committee's policy meeting expressed readiness to tighten policy further, if inflation risks materialize, as per CNBC.
According to Goldman Sachs CEO David Solomon, as quoted on Treasury and Risk, there may not be any interest rate cut by the Fed in 2024 because of a resilient economy bolstered by government spending.
JPMorgan Chase’s Chairman and CEO, Jamie Dimon, holds a similar perspective. According to an article by CNBC, Dimon believes that there is still a likelihood that the rates could still be hiked to control the persistent high inflation levels, fueled by ongoing fiscal and monetary stimulus. Dimon also warns of the economy experiencing stagflation, with persistent inflation amid sluggish growth and high joblessness, as the worst outcome.
Exploring Factors Keeping Rates High
According to a Reuters article, high interest rates could last not just for this year but possibly longer if financial markets are correct. Increasing government debt due to rising spending needs results in high interest costs, which may keep interest rates elevated for a longer period.
As global investments increasingly prioritize climate control, interest rates may remain elevated due to the huge investment demand for transitioning to a green economy.
Goldman Sachs anticipates that AI-powered productivity enhancements could elevate U.S. economic growth by 0.4 percentage points by 2034, according to Reuters. The company anticipates that rates may rise, especially if the use of AI picks up speed.
Exploring ETFs
Below, we have highlighted a few ETF areas that investors may consider expanding their exposure to. These offer a hedge amid uncertainties surrounding the path of interest rates.
Value ETFs
Value stocks have a track of long-term outperformance and resilience against market trends. Characterized by solid fundamentals such as earnings, dividends, book value and cash flow, these stocks trade below their intrinsic value, representing undervaluation. They offer the potential for higher returns and lower volatility compared to growth and blend stocks.
Vanguard Value ETF (VTV - Free Report) – has gained 14.30% over the past year and 4.39% over the past three months.
iShares Russell 1000 Value ETF (IWD - Free Report) – has gained 13.25% over the past year and 4.14% over the past three months.
iShares S&P 500 Value ETF (IVE - Free Report) – has gained 17.95% over the past year and 3.06% over the past three months.
Dividend ETFs
Dividend-paying securities serve as primary sources of reliable income for investors, particularly during periods of equity market volatility. These stocks offer dual advantage safety— in the form of payouts and stability in the form of mature companies that are less volatile to large swings in stock prices. Companies offering dividends often act as a hedge against economic uncertainty.
Vanguard Dividend Appreciation ETF (VIG - Free Report) – has a dividend yield of 1.76% and has gained 13.29% over the past year.
Schwab US Dividend Equity ETF (SCHD - Free Report) – has a dividend yield of 3.37% and has gained 9.91% over the past year.
Vanguard High Dividend Yield Index ETF (VYM - Free Report) – has a dividend yield of 2.83% and 12.42% over the past year.
Consumer Staples ETFs
Consumer staples are essential products like food, beverages, household items and hygiene products, including alcohol and tobacco. They are non-cyclical, with demand remaining consistent regardless of economic conditions.
Consumer Staples Select Sector SPDR Fund (XLP - Free Report) – has gained 0.36% over the past year and 4.31% over the past three months.
Vanguard Consumer Staples ETF (VDC - Free Report) – has gained 2.87% over the past year and 4.64% over the past three months.
iShares U.S. Consumer Staples ETF (IYK - Free Report) – has lost 0.40% over the past year and 4.15% over the past three months.
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High Rates to Stay? ETFs to Secure Your Portfolio
Fed policymakers hinted at the possibility of interest rates remaining high for an extended period of time if inflation data remains unfavorable. According to CNBC, recently released minutes from the Apr 30-May 1 Federal Open Market Committee policy meeting indicated concerns of policymakers regarding the timing of interest rate cuts.
Highlighting concerns about inflation, the lack of confidence among policymakers regarding a reduction in interest rates is evidenced by declining market expectations for rate cuts.
Will the Interest Rate Remain High?
Revising their expectations downward from the previously priced at least six quarter-percentage point cuts, investors currently price in two rate cuts this year, as early as September. However, with the shrinking odds for more cuts, investors are giving a rate cut in September about a 50% possibility.
Several participants from the Apr 30-May 1 Federal Open Market Committee's policy meeting expressed readiness to tighten policy further, if inflation risks materialize, as per CNBC.
According to Goldman Sachs CEO David Solomon, as quoted on Treasury and Risk, there may not be any interest rate cut by the Fed in 2024 because of a resilient economy bolstered by government spending.
JPMorgan Chase’s Chairman and CEO, Jamie Dimon, holds a similar perspective. According to an article by CNBC, Dimon believes that there is still a likelihood that the rates could still be hiked to control the persistent high inflation levels, fueled by ongoing fiscal and monetary stimulus. Dimon also warns of the economy experiencing stagflation, with persistent inflation amid sluggish growth and high joblessness, as the worst outcome.
Exploring Factors Keeping Rates High
According to a Reuters article, high interest rates could last not just for this year but possibly longer if financial markets are correct. Increasing government debt due to rising spending needs results in high interest costs, which may keep interest rates elevated for a longer period.
As global investments increasingly prioritize climate control, interest rates may remain elevated due to the huge investment demand for transitioning to a green economy.
Goldman Sachs anticipates that AI-powered productivity enhancements could elevate U.S. economic growth by 0.4 percentage points by 2034, according to Reuters. The company anticipates that rates may rise, especially if the use of AI picks up speed.
Exploring ETFs
Below, we have highlighted a few ETF areas that investors may consider expanding their exposure to. These offer a hedge amid uncertainties surrounding the path of interest rates.
Value ETFs
Value stocks have a track of long-term outperformance and resilience against market trends. Characterized by solid fundamentals such as earnings, dividends, book value and cash flow, these stocks trade below their intrinsic value, representing undervaluation. They offer the potential for higher returns and lower volatility compared to growth and blend stocks.
Vanguard Value ETF (VTV - Free Report) – has gained 14.30% over the past year and 4.39% over the past three months.
iShares Russell 1000 Value ETF (IWD - Free Report) – has gained 13.25% over the past year and 4.14% over the past three months.
iShares S&P 500 Value ETF (IVE - Free Report) – has gained 17.95% over the past year and 3.06% over the past three months.
Dividend ETFs
Dividend-paying securities serve as primary sources of reliable income for investors, particularly during periods of equity market volatility. These stocks offer dual advantage safety— in the form of payouts and stability in the form of mature companies that are less volatile to large swings in stock prices. Companies offering dividends often act as a hedge against economic uncertainty.
Vanguard Dividend Appreciation ETF (VIG - Free Report) – has a dividend yield of 1.76% and has gained 13.29% over the past year.
Schwab US Dividend Equity ETF (SCHD - Free Report) – has a dividend yield of 3.37% and has gained 9.91% over the past year.
Vanguard High Dividend Yield Index ETF (VYM - Free Report) – has a dividend yield of 2.83% and 12.42% over the past year.
Consumer Staples ETFs
Consumer staples are essential products like food, beverages, household items and hygiene products, including alcohol and tobacco. They are non-cyclical, with demand remaining consistent regardless of economic conditions.
Consumer Staples Select Sector SPDR Fund (XLP - Free Report) – has gained 0.36% over the past year and 4.31% over the past three months.
Vanguard Consumer Staples ETF (VDC - Free Report) – has gained 2.87% over the past year and 4.64% over the past three months.
iShares U.S. Consumer Staples ETF (IYK - Free Report) – has lost 0.40% over the past year and 4.15% over the past three months.