Fed’s Rate Hold Sparks Market Rebound
The Federal Reserve’s decision to maintain interest rates at 4.25-4.5% sent shockwaves through the ETF market on Wednesday, with the Invesco QQQ Trust (QQQ) initially plummeting before staging a remarkable comeback, ultimately trimming losses to a mere 0.2% by late afternoon.
A Delicate Balancing Act
The Fed’s move highlights the ongoing struggle to balance inflation control with economic growth support, a dynamic that continues to shape ETF investor strategies across various sectors, from bonds to equities. As markets adjust expectations for future rate cuts, this delicate balancing act will remain a key factor in shaping investor decisions.
Anticipated Move
According to Kent Thune, etf.com research lead, the Fed’s decision was widely anticipated, with the CME FedWatch tool forecasting a 99.5% chance of a rate pause. This anticipation likely contributed to the market’s swift recovery, as investors quickly adjusted their expectations.
ETF Performance
The SPDR S&P 500 ETF Trust (SPY) recovered from steeper losses to trade down 0.5%, while the SPDR Dow Jones Industrial Average ETF Trust (DIA) showed remarkable resilience, falling just 0.3%, according to etf.com data.
Fed’s Rationale
The Federal Reserve cited solid “economic activity” and “somewhat elevated” inflation in its decision to maintain current rates, according to the central bank’s 2 p.m. ET statement. This decision suggests that the Fed is taking a cautious approach, weighing the need to control inflation against the risk of stifling economic growth.
Powell’s Outlook
During a press conference following the Federal Reserve Open Committee meeting, Fed Chair Jerome Powell offered a potentially encouraging outlook, stating that “we do expect to see further progress in inflation.” However, he repeatedly emphasized a “wait and see” approach to future policy decisions, leaving investors to ponder the implications of this stance.
Treasury Yields
Treasury yields have climbed 25% higher since September, reflecting the bond market’s heightened sensitivity to rate decisions, said Thune. The bond markets appeared to welcome Powell’s subsequent press conference comments, with the iShares 20+ Year Treasury Bond ETF (TLT) trading just 0.2% lower after recovering from deeper losses.
Economic Growth
Powell also indicated during the briefing that the economy grew about 2% in 2024, while housing activity has stabilized, suggesting that the Fed’s previous rate hikes have achieved their intended effect without triggering a recession that many analysts had feared earlier in the tightening cycle. This news likely contributed to the market’s rebound, as investors welcomed signs of economic growth.
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