Equity ETFs Rise as Fed Keeps Rates Unchanged

Investor hopes for rate cuts in the first half of 2024 have waned as inflation remains stubbornly high.

Contributing Editor
Reviewed by: etf.com Staff
Edited by: Ron Day

Equity ETFs rose and fixed income funds were mixed after the U.S. central bank left the federal funds rate unchanged for a third consecutive meeting of its Federal Open Market Committee, while signaling three interest rate cuts on tap through the rest of the year.

The biggest stock ETFs, the SPDR S&P 500 ETF Trust (SPY) and Vanguard 500 Index Fund (VOO) were all up slightly after the 2 p.m. announcement. A bond market proxy, iShares 20+ Year Treasury Bond ETF (TLT), slipped.

In recent months, investors had largely relinquished hope that the Federal Reserve would start cutting the funds rate—the short-term interest rate commercial banks charge one another for borrowing and lending their excess reserves—after three months of disappointing inflation reports. Last week, the Consumer Price and Producer Price Indexes, the most widely watched inflation measures, rose slightly more than expected with the PPI 0.6%, up from January and higher than the 0.3% forecast. 

In the days before the FOMC's two-day meeting, which began Tuesday, the CME FedWatch tool calculated a more than 99% probability that the Fed would not hike rates, and FedWatch's longer-range charting has suggested that rate cuts might not occur until June at best.

Fed Rate Decision, Cautious Outlook

On Wednesday, the bank kept rates between 5.25% and 5.50%, where they've stood since last July when it raised the rate quarter of a point. That increase capped a 15-month stretch of rate hikes that the Fed hoped would tame raging inflation, which soared to 9% in the summer of 2022. The Fed is hoping to hit a 2% goal, but inflation has remained stubbornly above 3%, largely the result of high prices for energy and goods. 

Fed Chair Jerome Powell and other bankers have been cautious in their remarks this year, even as they've noted months-long progress in forcing prices downward. In his semiannual testimony before Congress earlier month, Powell said that the bank would likely cut rates this year but only after it "gained greater confidence that inflation is moving sustainably toward 2 percent."

Powell noted that "the economic outlook is uncertain, and ongoing progress...is not assured," adding that "reducing policy restraint too soon or too much could result in a reversal of progress we have seen in inflation and ultimately require even tighter policy."

In announcing the latest decision on Wednesday, the Fed said reiterated its concerns about the economy and that it "remains highly attentive to inflation risks."

"In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent," the Fed said in a statement. "In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks."

James Rubin is a contributing editor for etf.com, where he produces the Morning Exchange and Weekly Exchange newsletters. A longtime financial writer, editor and book author, he formerly held positions as a news and markets editor for the Americas at CoinDesk, where he focussed on cryptocurrencies. 

He provided editorial guidance for a Wall Street Journal best-selling book on Bitcoin and oversaw a startup newsroom focused on digital financial assets. He has edited for TheStreet and Unchained, where he wrote daily news stories about the trial of fallen crypto entrepreneur Sam Bankman-Fried. His writing has also appeared in The Hollywood Reporter, Forbes.com, AdWeek, Bankrate, The Financial Brand and The Wall Street Journal. He has also written for Forbes Insights and the Economist Intelligence Unit, including papers presented at World Economic Forums in Davos and Mumbai. 

James is the co-author of The Urban Cyclist’s Survival Guide (Triumph Books) and has been interviewed about bike safety on a number of NPR affiliates. In a prior career, Rubin was a world-ranked tennis player, once competing in Wimbledon’s qualifying rounds. He speaks fluent German and is a graduate of the Columbia University Graduate School of Journalism and received his BA at Columbia University.