The Federal Reserve left interest rates unchanged on Wednesday for the fourth straight policy meeting, keeping the benchmark federal funds rate in the 3.5-3.75% range. The decision was unanimous, marking the first unanimous vote since last June.
This meeting was also the first under the new Fed Chair Kevin Warsh. While the Fed kept rates on hold, its latest projections suggest that policymakers are leaning toward keeping borrowing costs higher for longer. Several officials now signal rate hikes later this year, as quoted on Yahoo Finance. Wall Street slipped on Wednesday.
Sticky Inflation Keeps the Fed on Guard
The Fed's outlook has turned more hawkish as inflation has picked up again while the labor market remains resilient. Policymakers had previously penciled in one rate cut for 2026, but rising energy prices linked to the Middle East conflict and a stronger-than-expected job market have prompted them to rethink that path.
Dot Plot Points to Higher-for-Longer Rates
The Fed's latest dot plot also reflected the more cautious stance. Only 18 of the 19 FOMC members submitted interest-rate projections, as Warsh chose not to include his own forecast. Eight officials expect no rate changes this year, three see one rate hike, five expect two hikes, while one projects even four hikes. Only one policymaker expects a single rate cut.
Inflation Forecasts Move Higher
The Fed significantly raised its inflation outlook. Officials now expect headline inflation to reach 3.6%, up from 2.7% previously. Core inflation is expected to come in at 3.3% versus the earlier estimate of 2.7%.
Growth Slows Slightly, Job Market Holds Up
Alongside the higher inflation forecasts, the Fed trimmed its outlook for economic growth. GDP is now expected to grow 2.2% this year, down slightly from the previous estimate of 2.4%.
Even so, the labor market continues to look healthy. The unemployment rate is now projected at 4.3%, a tad below the earlier forecast of 4.4%, suggesting employment conditions remain relatively strong despite tighter monetary policy.How to Top of Form
How to Play the Scenario With ETFs?
Don't Fear Higher Rates: Continue to Play AI ETFs
SpaceX's blockbuster market debut and the looming IPOs of artificial intelligence (AI) biggies like Anthropic, OpenAI and Perplexity could fuel AI ETFs, potentially outweighing concerns over higher-for-longer interest rates. AI is the key theme of the current technological revolution. Higher rates are unlikely to meaningfully derail the winning momentum of the AI rally. Roundhill Generative AI & Technology ETF CHAT gained 1.24% on June 17.
Greenback to Stay Steady
Invesco DB US Dollar Index Bullish Fund UUP has added about 4% this year and was up 0.9% on Wednesday. A high-rate environment along with an unstable geopolitical scenario is good news for the greenback.
Play Japan ETFs
Japan ETFs have been in good shape currently. Japan's May exports jump double-digit, led by AI-driven chip demand and auto shipments. Although the Bank of Japan is currently in a hawkish mode, a stronger U.S. dollar should weaken the value of the yen compared with the greenback.
The very move would favor the export-oriented Japanese stock indexes and ETFs. WisdomTree Japan Hedged Equity ETF DXJ added 0.9% on June 17 (read: ETFs in Spotlight as Japan's May Exports Jump 17%, Beating Estimates).
Small-Caps May Gain Strength
Any strength in the greenback is good for smaller-cap stocks, as they have less foreign exposure and don’t have to bear the brunt of negative currency translations. Also, small-caps’ earnings momentum and resilient U.S. labor market are positives for pint-sized stocks.
Lower energy risks for the U.S. economy are added benefits in the current scenario. Hence, one can track State Street SPDR Portfolio S&P 600 Small Cap ETF SPSM (read: A Few Reasons Why Small-Cap ETFs Are Good Bets Now).
Look for Solid Current Income
The hunt for dividends in the equity market is always on, irrespective of how it is behaving. After all, who doesn’t like a steady stream of current income along with capital gains? And if investors are mired in a web of equity market uncertainty, global growth worries and geopolitical crisis, the lure for dividend investing increases further.
If the Fed hikes rates further, high current income could help investors weather the adverse impact to some extent. iShares International Select Dividend ETF IDV (yields 5.27% annually) (up 6.5% this year) and State Street SPDR Portfolio S&P 500 High Dividend ETF SPYD (yields 4.10% annually) (up 9% this year) are examples of such ETFs.
Boost Your Portfolio with Our Top ETF Insights
Zacks' exclusive Fund Newsletter delivers actionable information, top news and analysis, as well as top-performing ETFs, straight to your inbox every week.
Don’t miss out on this valuable resource. It’s free!
Get it now >>WisdomTree Japan Hedged Equity ETF (DXJ): ETF Research Reports
Invesco DB US Dollar Index Bullish ETF (UUP): ETF Research Reports
State Street SPDR Portfolio S&P 500 High Dividend ETF (SPYD): ETF Research Reports
iShares International Select Dividend ETF (IDV): ETF Research Reports
State Street SPDR Portfolio S&P 600 Small Cap ETF (SPSM): ETF Research Reports
This article originally published on Zacks Investment Research (zacks.com).
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
